Risk Capital and MSMEs in India

Risk Capital is an important instrument for not only start-ups and innovative / fast growing companies but is also critical to those looking at growth. However the sources of risk capital are limited in developing countries. It is encouraging to note that with global integration of economy, emerging markets like India are sought after destinations for successful Private Equity (PE) funds. However, the PE Funds continue to focus on larger investments and bigger corporative units though there are more success stories of software and other new economy enterprises in the medium sector being assisted by Venture Capital (VC) Funds. Non-availability of timely and adequate funds at reasonable cost is one of the most important problems facing the MSME sector. Since the nineties the share of commercial bank credit that goes to the SSI sector is falling (though growing in absolute terms). Some of the major causes for low availability of bank finance to this sector are the high-risk perception, inadequate data and usage of external credit rating (there is need to scale up external ratings), weak corporate financial systems, early stage high transaction cost for small loans and high costs of the banks in lending to MSMEs. The lack of adequate collateral further hampers availability of funds to the sector. In such conditions, making various risk-capital options available to the MSME sector is essential. The paper highlights the capital constraints faced by the MSME sector in India and the associated need for developing a well funded risk capital regime for the sector. The emerging risk capital ecosystem for MSMEs is at a nascent stage and needs adequate support from Government and private sector alike to enable greater entry and spread of the MSME sector. The paper discusses the various risk capital options available internationally and at national level for development of an efficient regime. It also looks at ways to exercise these options given the diverse characteristics of the Indian MSME sector. Some of the major risk capital options available for MSME sector internationally and in India are Venture Capital, Angel Investors, Public Listing, etc. Some of the supplements to risk capital can also be explored, viz., Loan Funds, Guarantee Associations, Micro Finance, etc