Pandemic induced credit crunch faced by MSMEs and a rise in alternate financing methods

Anish Mashruwala and Sonali Singh

Covid-19 has had a devastating impact on economies across the globe. In developing economies like India, this impact has been felt most on the micro, small and medium enterprises (MSMEs) segment which forms an integral part of the economy. Due to the recurring lockdowns and ensuing halts in production, low demands and exodus of workers to their villages, the problems of the ever-vulnerable MSMEs have been magnified. One of the persisting issues of access to timely and adequate finance has further worsened due to the pandemic. According to a report by the International Finance Corporation, ¹ the credit gap in the MSME sector is estimated to be INR25.8 trillion (US$397 billion) and traditional sources of financing have not been able to successfully fund this gap. This article attempts to provide an insight into how the pandemic is giving a fillip to alternate modes of financing to MSMEs in India as opposed to the traditional sources, albeit with some challenges.