Micro, small, and medium-sized enterprises (MSMEs) in South Asia need more growth capital to boost the subregion’s resilience to shocks in the wake of the coronavirus pandemic, according to a report.
Economies in South Asia can strengthen their recovery and increase their resilience by channeling growth capital to innovative startups and entrepreneurs.
Much of the support so far provided to MSMEs in the region have focused on ensuring access to working capital for businesses amid the pandemic, it said, adding that more balanced support is needed both for firms hit badly by the pandemic and for those with high growth potential.
“Governments in South Asia have contributed to the survival of MSMEs during the pandemic through large stimulus packages, offering interest rate subsidies, refinancing, credit guarantees, and mandatory lending quotas,” said ADB’s acting chief economist Joseph Zveglich, Jr. “In the longer term, more attention should be paid to market-based financing via capital markets and digital platforms.”
MSMEs, including cottage firms (small manufacturing and home businesses), account for 99.6 percent of all enterprises, 76.6 percent of the workforce, and 33.9 percent of South Asia’s gross domestic product (GDP) on average.
The credit market for these businesses remains small, measuring 7.0 percent of GDP and 14.8 percent of total bank lending on average during 2015–2020, although the market is growing. Microfinance is helping meet working capital needs, the report said.
However, the rise of nonperforming loans in the credit market remains a challenge, it observed.
Many MSMEs remain unregistered and informal, making it difficult for government support to reach them. They largely supply domestic markets.
Formalising these businesses and connecting them to international markets would enhance their resiliency and boost national productivity, the report cited. Designing policies to support MSMEs has grown more challenging as the sector has become more complex, the report said. It said development of data infrastructure and the use of a single national MSME definition would promote efficient delivery of evidence-based assistance to these businesses and help accelerate inclusive growth.
A dedicated MSME law should be considered in countries with no legal framework on MSMEs for effective support.
The report presents a detailed assessment of financial and nonfinancial issues facing MSMEs in South Asia, as well as data updates for Southeast Asia, which was covered by the Asia Small and Medium-Sized Enterprise Monitor 2020.