More growth capital needed for micro, small, and medium-sized businesses in South Asia post-pandemic
MANILA, PHILIPPINES (1 December 2021) — 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 disease (COVID-19) pandemic, according to a report released today.
Economies in South Asia can strengthen their recovery and increase their resilience by channeling growth capital to innovative startups and entrepreneurs, according to the first volume of the Asia Small and Medium-Sized Enterprise Monitor 2021, released by the Asian Development Bank (ADB). Much of the support so far provided to MSMEs in the region has focused on ensuring access to working capital for businesses amid the pandemic, but 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 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% of all enterprises, 76.6% of the workforce, and 33.9% of South Asia’s gross domestic product (GDP) on average. The credit market for these businesses remains small, measuring 7.0% of GDP and 14.8% of total bank lending on average during 2015–2020, although the market is growing. Microfinance is helping meet working capital needs. However, the rise of nonperforming loans in the credit market remains a challenge. A dedicated equity market for small and medium-sized enterprises has emerged in the region, increasing its role as a growth capital delivery channel.
Many MSMEs remain unregistered and informal, making it difficult for government support to reach them. They largely supply domestic markets. Formalizing these businesses and connecting them to international markets would enhance their resiliency and boost national productivity.
Designing policies to support MSMEs has grown more challenging as the sector has become more complex. 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.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.