Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian economy.. MSMEs are badly affected by Covid-19 lockdown and are facing liquidity issue, delay in payments, risking high default, supply chain disruption and shortage of labour etc. Post pandemic, they need to scale up their sales and business. Therefore, providing the supply of trade finance to MSMEs must be a high priority for all the stakeholder working to stem the economic damage. Export can spur the growth of MSMEs.

1. Why MSMEs need extra support for Trade Finance?
Brief background
Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian
economy. They play a very significant role the Indian Economy in terms of Gross
Domestic Product (GDP), Exports and Employment generation. MSMEs contribute
nearly 31% of the GDP, around 48% of the exports and generate more than 11
Crores employment.
India has approximately 633.88 lacs MSMEs. MSMEs is dominated by micro
enterprises with 630.52 lacs (more than 99%) of total estimated number of MSMEs,
followed by small enterprises with 3.31 lacs (0.52%) and medium enterprises with
0.05 lacs (0.01%). Out of 633.88 lacs estimated number of MSMEs, 324.88 lacs
MSMEs (51.25%) are in rural area and 309 lacs MSMEs (48.75%) are in the urban
areas.
Change in definition of MSMEs
The revised definition of MSMEs is as under ( w.e.f. 01.07.2020):
Composite Criteria: Investment in Plant & Machinery/equipment and Annual
Turnover for Manufacturing Enterprises & Enterprises rendering Services
Classification
Micro: Investment in P&M < Rs. 1 Crore & Annual Turnover < Rs.5 Crore
Small: Investment in P&M < Rs.10 Crore & Annual Turnover < Rs.50 Crore
Medium: Investment in P&M < Rs.50 Crore & Annual Turnover < Rs.250 Crore
Importance of Trade finance for MSMEs
• Trade Finance is a massive driver of economic development and helps
maintain the flow of credit in supply chains.
• International trade is risky. Trade finance is used to manage this risk. This is
why MSME exporters dependent on trade finance.
• Trade finance offers low-cost, short-term solution to provide MSMEs with the
immediate capital required to carry out their Export Import transactions.
• Trade finance helps in growth of a business by providing funds required for
purchase goods and stock.
• Managing cash and working capital is critical to the success of any business.
Trade finance is a tool which is used to unlock capital from a MSME’s existing
stock or receivables.
• A trade finance facility may allow MSMEs to offer more competitive terms to
both suppliers and customers, by reducing payment gaps in their trade cycle.

2. • It allows MSMEs to keep higher stock level or give big orders to suppliers,
leading to higher level of economies of scale and bulk discounts.
• It allows MSMEs to be more competitive.
It is beneficial for supply chain relationships and growth. It increases the revenue
potential of MSMEs and earlier payments of export orders usually lead to higher
margins.
MSMEs can also mitigate business risks by using appropriate trade finance
structures. Late payments from debtors, bad debts, excess stock and demanding
creditors can have detrimental effects on a business. External financing or revolving
credit facilities can ease this pressure by effectively financing trade flows.
Challenges of MSMEs in Trade Finance:
• MSMEs are not very much familiar with trade finance, therefore, not able to
get the required fund for purchase of stocks to execute the export orders.
• MSMEs lack capital due to inadequate access to finance and credit. They are
not able to manage cash and Working Capital leading to limiting their
business.
• Trade finance is treated as a complex subject, therefore, MSMEs are not able
to explore the full potential of Cross border transactions by availing Trade
Finance.
• Due to lack of knowledge, they are not able to avail all the benefits and
incentives provided by Government in this regard.
• MSMEs inherent issues like inability to attract talent and tech-savvy
manpower, poor infrastructure and utilities, lack of innovation, technology and
digital knowledge gap alongwith lack of marketing know-how make the
situation more difficult for them.
• Lengthy procedures for securing a loan and also the amount of paperwork
and documentation required are often off-putting and cumbersome to MSMEs.
Due to these challenges, MSMEs are unable to scale to their full potential, rise up to
the standards of their international peers and become self-sustainable. On the
positive side, these challenges should be perceived as untapped opportunities for
the MSME sector. These challenges offer a broad scope to strengthen the
foundation of MSMEs in India.
Challenges for MSMEs in accessing Trade Finance from Banks
• MSMEs face challenges in accessing the banks trade finance to boost their
export business. Receipt of export order is not the sole criteria for getting the
trade finance. Despite government directives and bank’s internal guidelines /
schemes to promote export, it has been observed that while assessing any
export finance, banks though take cognisance of export orders, but final call
to give the loan or not, depend on their traditional way of working capital
(WC) assessment i.e. based on MSMEs balance sheets, credit reports,
present and future plan, security / collateral etc.

3. • Most of the time, MSMEs will not have strong balance sheet, proven export
past track record or sufficient security / collateral to offer. These all lead to
non-availability of trade finance to them despite receipt of export order.
Unless an export order is under LC, exporter has to cross all the normal
traditional lending criteria prescribed by the bank, which most to the time
difficult for MSMEs to complied with. Banks perceive MSMEs as a high risk
market segments.
• For the above reasons, majority of MSMEs requests (particularly of new
entrants in export business) for trade finance are rejected by banks.
• When a proposal is rejected by one bank, there are two options left with
MSMEs: find an alternative or drop the transaction. But getting another bank
or an alternative source for trade finance is more difficult as bank density is
thin and alternative source of funding is hardly available. Very few MSMEs
re-submit a proposal when it gets rejected.
• If export orders seem to be important, few MSMEs try to mobilise the
resources from informal fund providers, which are a costly affair for them.
• This trade finance gap means exclusion from the trading system and that
major trade and growth opportunities are missed. This also means that the
cost of trade will increase.
• Even export order against Letters of Credit (LC) would not ensure certainty
of getting the trade finance on time. Pre-shipment funding for procurement of
raw materials/ stocks to execute the export order against LC is being done
based on traditional method WC assessment. This means specially for first
timer MSME exporter, mere grabbing an export order against LC (sight or
usance) is not sufficient to get pre-shipment finance unless supported by
healthy balance sheet and collaterals etc.
• Post-shipment funding will depend on the reputation of the LC issuing bank,
importer’s country risk and even sometimes on importer’s past track record
etc. For export documents under sight LC, immediate upfront funding is
usually not available. Documents are mostly sent on collection basis and
exporters receive the export payment when issuing bank remits the same.
• For export documents under usance LC, banks usually prefer to do the
funding only after receipt of acceptance from the LC issuing bank. There are
incidents, where even after receipt of the acceptance, funding has been
delayed due to non-availability of bank’s line on LC issuing bank.
• Wherever confirmation is added to Export LC by local reputed banks, upfront
funding normally gets available to the exporter if complaint documents are
presented. But question is how many MSMEs can dictate the terms of export
LC and get the confirmation added by local banks. Apart from this,

4. presentation of compliant documents under LC is also an uphill task for
MSMEs due to lack of expertise on documents preparation and there is quite
possibility that discrepancies would be raised by the confirming / negotiating
bank to avoid upfront payment. Given the chance, bank would try to send
the documents on collection basis and do the funding post receipt of
confirmation from LC issuing bank.
• Problem with first timer MSME exporter is more severe. They go and hunt
for export orders, put their best to get the export orders and make their
business plan accordingly only to find the bitter reality of non-availability of
trade finance against such export order unless supported by strong balance
sheets and collaterals.
• Timely support of trade finance is essential for the growth of MSMEs so that
they can execute the export order on time and multiply sales. But when the
focus is on risk and other assessment parameters, bank sometime
underestimates the importance of timely support of trade finance and take a
longer TAT for providing Trade Finance, which ultimately result into failure of
executing the export order by the MSME exporter and missing the
opportunity to grow.
• Lending criteria of banks still lacks giving importance of export orders in
hand for trade finance. They treat all MSMEs equally either they do export or
not and lend accordingly. Exporter has to go through the same assessment
criteria as others.
• Banks have a feeling that MSMEs most of the time don’t fulfil the lending
criteria.
• Banks feel lending to MSMEs a bit riskier compare to corporates as there is
a much higher default risk with MSMEs in comparison to corporates.
Road Ahead
MSMEs are badly affected by Covid-19 lockdown and are facing liquidity issue, delay
in payments, risking high default, supply chain disruption and shortage of labour etc.
Post pandemic, they need to scale up their sales and business. MSMEs desperately
need liquidity to survive the on going economic crisis and international trade will be a
vital form of relief for them in forthcoming days. Therefore, providing the supply of
trade finance to MSMEs must be a high priority for all the stakeholder working to
stem the economic damage. Export can spur the growth of MSMEs. Export will allow
MSMEs to reach bigger markets and learn new skills that increase their profitability
and business growth. Brief road ahead in this regard has been discussed here with
reference to government, MSMEs themselves and bank.

5. Government:
• The Government of India has envisioned making India a USD 5 trillion
economy and a global economic powerhouse by FY 2024-25. Government
aims to enhance MSME’s share in exports and its contribution to GDP.
• In revised MSME criteria, turnover with respect to exports will not be counted
in the limits of turnover for any category of MSMEs. This will encourage the
MSMEs to export more and more without fearing to loose the benefits of a
MSME unit. This is expected to exponentially add to exports from the country
leading to more growth and economic activity and creation of jobs.
• Some of the drawbacks needs to be taken care of which are obstructing
export preparedness like poor trade support, gaps in export infrastructure,
basic trade support, lack of access to financial facility and low export credit.
Government has implemented various initiatives, policies, guidelines and
frameworks etc to support MSMEs grow their export business. It would be
difficult to elaborate here all the government schemes meant for MSME
exports.
MSMEs:
• To have adequate knowledge about trade finance, adopting new innovative
technologies and digitization.
• To be aware about global market. Being aware is often the first step towards
preparing for the international market.
• To have awareness about all the government’s incentive schemes such an
extension of Interest Equalization Scheme, credit available under Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), protection
available under Export Credit Guarantee Corporation of India (ECGC) etc.
Bank:
• Collateral-free credit: A simple solution lies in easy credit without elaborate
collateral requirements and available quickly without lengthy processing
times. Collateral-free credit will ensure an active export cycle without added
pressure on the MSME exporter. Export order based pre-shipment finance to
be provided upfront based on the enhanced due diligence on exporter, his
business model, track record if any and genuineness of the export transaction
but without asking for collateral security.
• Banks will certainly assess the risk of production, delivery and non-payment
by the buyer. Repayment of the loan is based upon the lifecycle of the trade,

6. from production of goods and later sale. Government may come out with the
risk mitigation scheme to boost the export like extension of insurance
coverage scope of ECGC to protect the bank’s interest or cover such
advances under guarantee like Emergency Credit Line Guarantee Scheme
(ECLGS) or CGTMSE scheme.
• Trade finance focuses more on the trade than the underlying borrower, i.e. it
is not balance sheet led. Therefore, MSMEs with weaker balance sheets
should be allowed to use trade finance so that they can trade significantly
larger volumes of goods or services and work with stronger end customers.
• Need to push for export finance products like invoice / export bill discounting
(post-shipment finance) by the bank which are short term finance ranging
tenor from 60 to 120 days and they are self-liquidating in nature, carries less
risk.
• Encourage short term products like factoring, forfaiting etc to ease the working
capital requirements.
Conclusion
Unless governments intervene to backstop the supply of export credit from
commercial banks, MSMEs will suffer from shortages of export credit that could
starve them of essential liquidity and halt global opportunities. Governments need to
prioritise interventions that will unlock trade finance for MSMEs and keep the Indian
economy moving forward. In light of the above, the need for export-led growth
becomes more pertinent than ever. Even for our country, which possesses a vast
domestic market, high growth can only be sustained with an export-oriented policy
for MSMEs. To promote collateral-free export finance to MSMEs, government may
come out with scheme like extension of insurance coverage scope of ECGC to
protect bank’s interest or cover such advances under guarantee like ECLGS or
CGTMSE scheme.
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