The main source of seed funding for micro, small and medium enterprises (MSMEs) in Nepal comes from inheritance, ancestral properties, income and savings, according to a recent report.
According to the Small and Medium-Sized Enterprise Monitor report published by the Asian Development Bank, 33.1% of MSMEs use inherited assets or ancestral properties while 25.8% use their income and savings for initial financing of their business.
Access to bank credit remains limited for MSMEs, with only 16% going to banks and financial institutions.
MSMEs largely supply domestic markets, and since many are unregistered and informal, their formalization and connection to international markets would boost domestic productivity, the report said.
About 85 percent of workers in Nepal are informal. The majority of MSMEs are engaged in services and operate in rural areas of the region; only a few cater to international markets, although their impact on exports varies by country.
The report shows that other sources of seed finance for MSMEs are informal credit (8%), remittance income (6.8%), cooperatives (5.9%) and venture capital (0 , 5%).
To improve access to finance, the government and the central bank offer several low-interest loan programs, a compulsory loan program (5% of loan portfolios are allocated to target groups such as MSMEs), refinancing and advisory services.
Umesh Prasad Singh, acting chairman of the Federation of Nepalese Crafts and Handicrafts Industries, told the Post that the government announced provisions but they are never implemented.
“The complex banking process discourages many MSME entrepreneurs from obtaining bank loan services,” Singh said. He added that those with ties to bank managers get loans more easily.
“Others have trouble getting loans. This is why people are ready to sell their ancestral property instead of going to banks and financial institutions to get a loan, ”he added.
Nepal Rastra Bank requires commercial banks to provide 40% of their loans to agriculture (15% by end of July 2023), energy and tourism (10% by end of July 2024) and to MSMEs (15% by end of July 2024).
Loans to MSMEs are defined as loans of less than Rs 10 million. Likewise, development banks must issue 20% and finance companies 15% of their loans to these sectors by 2023.
The central bank also requires banks and financial institutions to provide other types of concessional loans. They are required to lend at least 5% of their portfolio to groups such as women, small farmers, artisans and ethnic minorities, with loans of up to 500,000 rupees.
“Although the government provides credit facilities to MSMEs, entrepreneurs who turn to banks are only 16%, as stated in the report, which shows that entrepreneurs do not want to turn to them. This shows that access to bank credit remains limited for MSMEs, ”Singh said.
“The government has a provision to provide loans up to 1.5 million rupees without collateral for MSMEs, but banks ask for collateral even to provide credit of 1 million rupees,” he said. “Banks are unwilling to provide even 500,000 rupees due to the liquidity crisis.”
The central bank also offers refinancing for businesses, including MSMEs, with banks and financial institutions refinancing up to 1 million rupees at an interest rate of 3%, lower than the average of 8.6%. .
Many MSMEs have benefited from foreign investment.
In 2019-2020, 4,213 small businesses had received a foreign investment authorization, or 83.4% of all businesses with foreign investment. In addition, 10.4 percent of medium-sized enterprises and 6.2 percent of large enterprises attracted foreign investment.
However, the amount of foreign investment per entity is much lower for MSMEs than for large firms. On average, a large company received Rs 661.5 million, a medium-sized company received Rs 98.9 million and a small company received Rs 17.4 million
In 2019-2020, according to the report, 314 large-scale industries had received foreign investment amounting to Rs 207.72 billion.
The report indicates that MSMEs provide employment for 453,195 people.
The challenges for the development of MSMEs are the lack of entrepreneurial culture, the inadequate identification of target groups, the inability to link training to industries, the need to make the Challenge Fund operational and insufficient funds for start-ups, according to the report.
Failure to exploit the opportunities created by globalization and new technologies is also a challenge for the development of MSMEs, he said.
MSMEs contribute 22 percent of Nepal’s GDP. However, nearly half of all business establishments are unregistered, and more than 90 percent of workers working in MSMEs with fewer than 10 workers have informal relationships with employees, according to the Central Bureau of Statistics.
The contributions of MSMEs to the economy are not recorded in formal statistics and their impacts are not fully reflected in any analysis. So, according to the report, the impact of the pandemic on MSMEs has hurt the economy far beyond officially released data.