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Access to Finance: Challenges Faced by Micro, Small, and Medium Enterprises

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

Access to Finance: Challenges Faced by Micro, Small, and Medium Enterprises in

India

K. Rajamani1, N. Akbar Jan2, A. K. Subramani3, *, A. Nirmal Raj4

1
Department of Management Studies
Mepco Schlenk Engineering College (Autonomous)
Mepco Schlenk Engineering College Post
Sivakasi, Tamil Nadu, India – 626005
E-mail. [Link]@[Link]
2
Faculty of HR & OB
ICFAI Business School (IBS), Hyderabad
ICFAI Foundation for Higher Education (IFHE)
(Deemed to be University u/s 3 of the UGC Act 1956)
Donthanapally, Hyderabad, Telangana - 501203, India
E-mail. akbarjan75@[Link]
3
Department of Management Studies
St. Peter's College of Engineering and Technology
Avadi, Chennai - 600054. Tamil Nadu, India.
E-mail. draksubramani@[Link]; * Corresponding Author
4
Department of Management Studies
Saveetha Engineering College (Autonomous)
Thandalam, Kanchipuram District
Tamil Nadu, India – 602 105
E-mail. nirmalraaj1975@[Link]

[Link]

Access to finance plays a major role in the entrepreneurship development and economic growth of any country. It encourages
new entrepreneurial initiatives. Timely access to finance sustains the survival and growth of micro, small, and medium
enterprises (MSMEs). The purpose of this paper is to explore the challenges of access to finance faced by the MSMEs and
to analyze their impact on their business performance. The survey was conducted in 400 MSMEs from various industrial
clusters across India. The samples were selected using the quota sampling technique. The conceptual framework was
developed and tested using the structural equation model (SEM).Results show that firm attributes, sources of finance, and
the life cycle of an MSME have a significant positive impact on its access to finance, whereas financial obstacles have a
negative impact that prevents the growth of MSME and affects the economic growth of the nation.

Keywords: MSME; Firm Attributes; Access to Finance; Sources of Finance; Financial Obstacles; Performance; Access to
Credit.
Introduction exports across a diverse range of commodities (CII, 2019). It is
further added that the contribution of the present export of
Access to finance is the major concern for MSMEs in MSME is 50 % which could increase to 75 % through the
developing countries like India. The economic growth of extension of employment generation to 15 Crore people by
developing countries is grounded based on the development of 2024. At present, the MSMEs contribute 24 % to India’s GDP
MSMEs. The Indian economy has been supported by the micro, and it is expected to reach 50 % which is anticipated to scale
small and medium enterprises (MSME) sector for the past fifty up the Indian economy to $5 trillion by 2024. Further, the
years (MSME Annual Report, 2019). MSMEs significantly growth of MSMEs accelerates the achievement of social and
contribute to the economic development of developing and economic goals. India's total addressable demand for
developed nations and also account for 80 % of the global external credit was INR 41.64 trillion, while the country's
economic growth. In India, the MSME sector contributes to total supply of funds was INR 13.54 trillion. As a result, the
6.11 % of the manufacturing GDP, 24.63 % of the services MSME sector's loan shortfall in 2019 was INR 28.10 trillion
GDP, 33.4 % of the manufacturing output, and 34 % of the total (Mronindia, 2020). In India, getting institutional sources of

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 K. Rajamani, N. Akbar Jan, A. K. Subramani, A. Nirmal Raj. Access to Finance: Challenges Faced by Micro, Small, and…

funding for MSMEs is more difficult. (Pachouri & Sharma, This paper contributes to the literature in three aspects.
2016). Due to financial institutions' unwillingness to give First, it provides a framework to identify the financial
loans to small businesses or information asymmetry, the challenges faced by MSMEs enterprises in access to finance
majority of MSMEs in India rely on short-term financing in the selected five states, with a total share of 50.00% in
rather than long-term financing. Due to the difficulties of terms of several units and is considered as the backbone or
acquiring funding from banking institutions and capital engine of economic growth in India, to the best of our
markets, many small businesses in India use informal knowledge this area has not been explored or untapped
sources of finance. (Baker et al., 2020). Maximum number earlier. Secondly, it also contributes a comprehensive
of MSMEs in India facing challenges in the initial phases of framework to examine the cause and effect relationship
their entrepreneurial venture due to plenty of rules and between financial Challenges faced by MSMEs in access to
regulations, and lack of access to finance. According to Ease finance and its impact on firm performance, because earlier
of doing business ranking (2020), India was ranked as 63 studies (Guna & Natalja, 2011; Thampy, 2010; Charan &
with a DB score of 71.0. In general, a developing country Poornima, 2016; Beck & Demirguc-Kunt, 2006) have
like India has many loopholes in the system which thwart analyzed the impact of firm attributes, financial obstacles,
the new generation of entrepreneurs from expanding their sources of finance, and the life cycle of an MSME on its
business and dissuades them to venture into startups due to access to finance and its influence on firm performance.
challenges in access to MSME loans. However, these studies have taken into account only one or
Hence, the purpose of this study is to examine the two factors. Hence, there is a lack of empirical evidence
challenges encountered by the MSMEs in accessing finance regarding how all the mentioned factors together impact the
and its impact on firm performance. This research is aimed MSMEs' access to finance and affect the firm performance
to answer the following research questions (RQs): (Jaroslav et al., 2019). This study is of great significance to
RQ1: What is the impact of the firm attributes, financial take the Indian economy to the next level in near future.
obstacles, sources of finance, and the life cycle of an MSME Thirdly, the results of the study may trigger the policymakers
on the access to finance? of the Indian government by eliminating or minimizing the
RQ2: To what extent does access to finance influence the financial challenges faced by MSMEs through appropriate
performance of an MSME? measures using the latest technological interventions, which
The present research is important to understand the key will encourage the budding entrepreneurs to venture up new
factors which influence access to finance and its impact on entrepreneurial activities in India. Finally, the increase in
the performance of an MSME. The governments play a vital successful MSMEs could overcome emerging economic
role in promoting and developing entrepreneurship so that the issues in India namely unemployment, poverty, income
MSMEs are eligible for loan schemes, subsidies, and tax inequality, and weak economic growth.
benefits to support their continuous growth and to encourage The next section provides the literature review, followed
others to float start-ups (Thampy, 2010; Prasad, by the explanation of the conceptual model with relevant
2006). MSME financing is a significant element of many hypotheses to be tested, a description of the sample’s profile,
government policies (Kersten et al., 2017). A survey data analysis method and its interpretation, and finally, a
conducted by the International Finance Corporation (IFC) in discussion about the conclusions.
2018 reported that only 16 % of the total MSME debt
financing was provided by formal funding sources and the rest Literature Review
was self-supported or was from informal sources. All
Definition of MSME
financing channels of MSMEs are categorized into four
types, namely, in-house sources, finance from the market, As per MSME Act 2006, MSMEs are classified in terms
finance from a bank, and alternative sources of finance. The of investment and annual turnover. Table 1defines the
primary sources of MSME finance are bank loans, loans MSME classification in India.
from non-banking institutions, microfinance institutions, Table 1
venture capital, own funds, equity finance, and informal MSME Classification
finance. The MSMEs seek further growth through formal Criteria: Investment in Plant and Machinery or Equipment
financial sources like bank credit and venture capital, in
Classification Micro Small Medium
addition to reducing the use of informal finance (Shinozaki,
Investment Investment Investment
2014; Asian Development Bank, 2014). Following the Manufacturing
<Rs. 25 lac <Rs. 5 cr. <Rs. 10 cr.
pecking order theory, friends and family are the primary Investment Investment Investment
Services
sources of finance for MSMEs. This is because they have <Rs. 10 lac <Rs. 2 cr. <Rs. 5 cr.
limited resources and income, which is insufficient to repay Source: MSMED Act 2006
their debt obligations. The findings of previous studies also
reveal that the main issue faced by the MSMEs is access to Firm Attributes
finance (Fatoki & Asah, 2011; Beck, 2007; Banerjee, 2014).
The ability of MSMEs to access finance heavily According to Rational choice theory, firm attributes
influences their survival, growth, and expansion capacity. heavily influence both the demand and supply dimensions of
Lack of access to credit has always been a significant access to financial services. Previous studies have widely
obstacle in the progress of MSMEs in East and South Asian acknowledged that the characteristics of a firm play a
countries (Economic and Social Commission for Asia and significant role in influencing its access to finance. For
the Pacific (ESCAP), 2009). instance, a firm’s age signifies the ability of the organization
to withstand difficult times in the market. Since younger

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

firms do not have sufficient financial resources to deal with growth because internal finance is not sufficient to satisfy
severe economic conditions, they are more likely to fail. the demands of these firms (Pandula, 2011). Despite various
MSMEs tend to have comparatively less access to finance financial limitations, banks remain the primary provider of
than large firms (OECD, 2013; Saeed & Sameer, 2015). external finance to MSMEs,as they rely on banks more than
Gabbianelli (2018), in her research, stated that the local large firms do (Klonowski, 2012; Thampy, 2010).There are
presence and the robust relationships that the MSMEs have various sources of external financing available to MSME
established over the years with local stakeholders have entrepreneurs. MSMEs are often heavily dependent on
allowed easier access to finance. The firm’s size is a crucial straight debt to fulfill their investment and cash flow needs
factor; firms that have more tangible assets prefer to obtain (OECD, 2016). Also, owing to the constraints in the
long-term debt. Hence, companies with the huge investment financial market, MSME administrators are often unable to
are sufficiently diversified and therefore less competitive, easily procure new equity finance (Rocca et al., 2011). Thus,
enabling them to withstand high debt ratios and making access to finance differs based on each source of funding
them less vulnerable to failure. Schiffer & Weder (2001) available to the MSMEs. The governments and regulating
reported that small concerns always face hindrances agencies have extended incentives, grants, guided loans, and
compared to medium and large firms. Thus, it is evident subsidized lending to create a supportive platform and
from the literature that the primary predictors of a firm’s promote the MSMEs. However, they are still facing
financial challenges are its size, age, and ownership (Fatoki financial connectivity problems. Due to the various
& Asah, 2011). difficulties in accessing finance and its proper selection has
become an obligation.
Financial Obstacles
Life Cycle of an MSME
The Asian Development Bank (2014) specified that
access to finance is the foremost constraint faced by the Similar to the life cycle of a human being, organizations
MSMEs in India, followed by the necessity of collateral, also have life cycles that include birth, maturity, change, and
inflexible policies, high lending rates, complex processes, even death. The organizations need to undergo several
and the absence of financial knowledge of relevant schemes stages during their development over a specified period.
among entrepreneurs. These obstacles have a negative During this transformation period, the companies not only
influence on their access to finance. A fairly large number grow in size but also improve their processes and structures
of studies have examined these factors, confirming their to meet the demands of both the internal and external
negative effect on the growth of MSMEs. The lack of access environment (Phelps et al., 2007). The term ‘life cycle of an
to non-financial inputs, lack of access to finance, as well as MSME’ refers to the various stages which an MSME may
huge costs is the three major obstacles impeding the growth go through since its inception. Models in previous theories
of MSMEs. Pissarides et al. (2003) identified four have defined a life cycle as comprising several stages
constraints: access to land, timely delivery by suppliers, ranging from two to thirty-three (Phelps et al., 2007). Table
finance problems, and production constraints. The results of 2 presents the life cycle stages of an MSME as described by
their research also suggest that external financial access was various authors over the years.
the most severe problem among all other constraints. Table 2
According to Saghir, Aston (2017), government regulations, Life Cycle Stages of an MSME
interest rates, and financial crises are obstacles that have a Authors Life cycle stages of an MSME
statistically significant negative relationship with easy Lippitt & Schmidt
Birth, youth, and maturity
access to financial resources. MSMEs have reported finance (1967)
to be their most significant obstacle, as they tend to receive Courtship, infancy, go-go, adolescence,
loans after a lot of struggle. The most commonly addressed Adizes (1979) prime, stability, aristocracy,
issue in literature deals with the financial obstacles of recrimination, bureaucracy, and death
Creativity and entrepreneurial
MSMEs (Beck, 2007; Banerjee, 2014; Dong &Men, 2014). Quinn & Cameron
(collectively), formalization, and
(1983)
adaptation stages
Sources of Finance Creativity, direction, delegation,
Greiner (1998)
MSMEs face the problem of choice among various coordination, and collaboration
Entrepreneurial, collectivity,
sources of finance based on the services provided by the Richard (2007)
formalization, and elaboration stage
financial institutions. Rational choice theory of demand for Charan and Start-up, survival, growth, and
financial services comprises (i) the desire for financial Poornima (2016) sustenance.
services (ii) nature and type of services provided by the
financial institutions; and (iii) the terms and conditions of This study describes the life cycle of an MSME in four
services. stages: Conception/Development (<3 years), Commercialization
Selection of sources of finance by the individuals of (3–6 years), Growth (>6 years), and Maturity/Expansion (>
MSMEs also explained by the theory of bounded rationality, 6 years) (Singh, Wasdani, 2016). An MSME which is
rationality is restricted when individuals of MSMEs make successful in one particular stage of its life cycle may be able
decisions by the regularity of decision issues, the cognitive to reach the next stage. In general, the mortality rate of
limitations of thought, and the time available for the MSMEs is higher in the early stages due to poor practices.
selection of right source of finance. MSMEs have a high
demand for external finance (particularly debt) to fund their

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 K. Rajamani, N. Akbar Jan, A. K. Subramani, A. Nirmal Raj. Access to Finance: Challenges Faced by Micro, Small, and…

Access to Finance Finance (Fatoki & Asah, 2011; Beck, 2007; Banerjee, 2014;
Thampy, 2010; Charan & Poornima, 2016; Beck &
It is also referred to as the access to credit, which means
Demirguc-Kunt, 2006).
the capacity of the enterprises to acquire financial services,
which comprises insurance, payments, credit, deposit, and
Research Methodology
other services connected to risk management. Finance is the
lifeblood of any business; timely access to finance may Conceptual Framework and Hypothesis Development
enable the business to flourish or else it may perish soon.
A firm’s attributes, such as location, industry, size, age,
Access to finance through banks and formal financial
collateral influence, and incorporation, have an impact on
institutions is considered to be a tremendous challenge for
access to debt finance. MSME administrators should ensure
start-ups. As these firms are unable to produce financial
the presence of appealing firm attributes to induce banks to
reports, they are often neglected by the banks. The collateral
extend financing (Kira & He, 2012). In general, the firm’s
requirements are also an important factor influencing their
attributes and its legal status influence its access to finance
access to finance. MSMEs are regarded as “undesirable
(Zelalem & Wubante, 2019). Musamali & Tarus (2013)
borrowers” because they find it difficult to provide high-
found that the features of a firm, such as size, structure,
quality collaterals (Ayadi & Gadi, 2013). All the life-cycle
business period, and type of business have a definite impact
stages of MSMEs are greatly influenced by their ability to
on the MSMEs’ access to finance. This study uses five items
access finance. Financial access enables small businesses to
to assess firm attributes, namely, type, size, location,
make fruitful investments, subsequently contributing to
characteristics of the firm, and stage of the enterprise. The
economic growth as well as the eradication of poverty from
first hypothesis is formulated to analyze the effect of a firm’s
developing countries (Beck & Demirguc-Kunt, 2006).
attributes on its access to finance.
Access to finance is ranked third in the list of the variables
determining the financial growth of MSMEs in emerging H1: The firm’s attributes have a significant positive
countries (IFC, 2011).Financial constraints lead to limited impact on the MSME’s access to finance.
investment opportunities and stagnant growth. For MSMEs,
access to finance is extensively perceived to be a vital factor Obstacles in the path of an MSME’s access to finance are
that helps in maintaining their daily operations. It enables measured through five variables, namely, government
them to capitalize on long-term investment opportunities regulations, high-interest rates, lack of awareness about
and promotes the development of targets (Fanta, 2016; various available schemes, collateral requirements, and
Harvie et al., 2013; Jaroslav et al., 2017). lengthy procedures and documentation. The second
hypothesis attempts to verify the perceived association
Firm Performance between the identified financial obstacles and the access to
‘Firm performance’ refers to the performance of a finance. As a financial obstacle signifies a negative factor, it
company which not only measures the effectiveness and is assumed that it would have a negative impact on the
financial stability of the company but also considers its MSME’s access to finance.
performance concerning the market where it operates. H2: Financial obstacles have a significant negative
Several financial measures are adopted by companies to impact on an MSME’s access to finance.
examine their performance, with the common measures and
ratios being the growth of sales, liquidity ratio, capital While various sources of external financing are offered
adequacy, price of the stock, income, margin of profit, return only to the entrepreneurs who are on a growth trajectory,
on equity, and return on assets. The firm performance also bank loans are a common source of fund procurement for
depends on access to short-term and long-term finance. A many MSMEs and new entrepreneurs. However, owing to
survey was conducted among female-owned firms in constraints in the financial market, MSME administrators
African and Middle Eastern countries; the results revealed are often unable to procure new equity finance easily (Rocca
that insufficient access to finance was a significant factor et al., 2011). Thus, access to finance differs based on the
that led to very poor firm performance (Zindiye, 2008). source of funding available to the MSMEs. The “sources of
MSMEs cannot purchase sufficient raw materials to finance” factor is measured using five items, namely,
manufacture high-end products and services that meet global personal funds/savings, private banks, public sector banks,
standards or requirements, because of their insufficient cooperative banks, and money lenders. Thus, the third
access to finance. This also leads to MSMEs having trouble hypothesis aims to examine the association between various
in achieving their performance goals. (Karedza et al., sources of finance and the MSME’s access to finance.
2014).Specifically, the small firms that frequently complain H3: The sources of financehave a significant positive
about their limited access to finance, also experience a slow impact on an MSME’s access to finance.
growth trajectory. Bilal et al. (2017) mentioned that
predicting SMEs’ performance is an important area of The need for finance varies with the life-cycle stage of
research because their failure is both costly and disruptive to any MSME (Singh & Wasdani, 2016). The lifecycle of a
a variety of firm’s stakeholders, including investors, company is influenced by the selection of the source of
societies, and economies. Therefore, based on the above finance (Rautanen, 2013). MSMEs adopt various strategies
discussion, we have outlined five key factors that have an to meet their financial needs as they move across the
impact on firm performance: (1) Firm Attributes, (2) different stages in their life cycle. MSMEs and start-up firms
Financial Obstacles, (3) Sources of Finance/Financing have incompetent internal financial support to nurture
Decision, (4) Life Cycle of an MSME, and (5) Access to growth, and thus, owing to constraints in the financial

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

market, they are unable to procure new equity finance easily. MSME performance. Responses were obtained through the
Thus, against the conventional belief, debt is vital to growth self-administered questionnaire survey method of data
in the early stages of such firms. Access to finance increases collection using a five-point Likert scale that ranged from
during the maturity stage, which in turn accelerates the strongly disagree to strongly agree. The sample size was
growth rate of the firm. The life cycle of an MSME is limited to 400MSME enterprises from various industrial
assessed through the four stages, namely, development, clusters across India. Table 3 presents the number of
commercialization, growth, and maturity/expansion. The MSMEs in India published in the MSME Annual report
fourth hypothesis seeks to verify how access to finance is (2019) and the sampling distribution of the present research.
associated with the life cycle of an MSME.
Table 3
H4: The different stages of its life cycle have a significant Sampling Distribution
positive impact on an MSME’s access to finance. No. of MSMEs
S. No State/UT No. of Samples
(in Lakhs)
Access to finance and credit regulation is a major 1 Uttar Pradesh 89.99 80
challenge for the growth of MSMEs (Stevenson and Pond, 2 West Bengal 88.67 80
2016). The firms that are not credit-constrained observe 3 Tamil Nadu 49.48 80
quicker growth as compared to the credit-constrained firms 4 Maharashtra 47.78 80
(Fowowe, 2017). The results of earlier studies have 5 Karnataka 38.34 80
confirmed that access to finance has a significant effect on Total 633.88 400
the performance of a firm (Harashet al., 2014; Fowowe, Source: Ministry of Micro, Small and Medium Enterprises, Government of
2017). The firm’s access to finance is measured through five India. MSME Annual Report 2018–19. Available at [Link]
items, namely, loans offered without any collateral security, sites/default/files/[Link]-
reasonable interest rates, government-guaranteed loan
The states which had the maximum number of estimated
schemes, flexibility in the repayment schedule, and quick
MSMEs in India were selected for the study. The survey was
financing with simple documentation. The fifth hypothesis
conducted among various industrial units located in the
verifies the association between access to finance and
above-mentioned five states. The effects of access to finance
MSME performance.
on the performance of MSMEs were examined through the
H5: Access to finance has a significant positive impact measurement model and path analysis. The data were
on MSME’s performance. collected between January 2020 and April 2020 (four
months). The questionnaire was sent to various subject
The growing contribution of MSMEs in building the matter experts (academicians working in this domain) and
Indian economy increases the concern of all the stakeholders industry experts (officials from the MSME-Development
of the MSME sector - entrepreneurs, banks, and government Institute) to assess the content validity of the instrument. A
organizations in ensuring timely financial access to the final draft was prepared after incorporating the suggestions
emerging companies. The performance of an MSME is received from the experts. A pilot study was conducted with
measured through the increase in production volume, 30 samples (six from each selected state) and the reliability
increase in sales turnover, and profit growth, in addition to and validity of the structured questionnaire were verified. The
its performance relative to the competitors, and the overall survey was administered both by email and in person. The
business performance. MSMEs were approached mainly based on the information
provided by the MSME-Development Institutes of major
clusters, industrial directories of clusters, and the MSME
Associations. The MSMEs also responded to the survey after
being contacted via telephone or email or in person. The
MSMEs were chosen from the population through quota
sampling technique (Nonprobability sampling technique)
(Sunday et al., 2015; Bawono et al., 2020; Samsuri et al.,
2021).The final sample consisted of 400 MSMEs (i.e., 80
samples from each state). The distribution of the data was
verified by plotting Q-Q plot and two statistical tests of
Figure 1. Conceptual Framework normality namely Kolmogorov-Smirnov and Shapiro-Wilk
which confirms the normal distribution of data.
This study has developed a conceptual model to verify
and test the aforementioned hypothetical associations Results
between the chosen variables.
Sample Description
Survey Instrument and Sampling Design
The MSME owners were generally reluctant to disclose
The current research study seeks to analyze the basic the financial aspects of their business, which could
factors that influence access to finance and its impact on the constitute a possible limitation of the study. The sample of
performance of an MSME. The survey instrument used in MSMEs is geographically spread throughout India covering
this study has six factors and 29 items. The six factors of the 400 entrepreneurs from five states. The sample covers 160
research are firm attributes, financial obstacles, sources of units from manufacturing and 240 units from the service
finance, the life cycle of MSME, access to finance, and sector. Furthermore, it comprises 200 micro, 140 small, and

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 K. Rajamani, N. Akbar Jan, A. K. Subramani, A. Nirmal Raj. Access to Finance: Challenges Faced by Micro, Small, and…

60 medium enterprises. Among the 400 MSMEs surveyed, constructs also was verified by Krippendorff's alpha (i.e. inter-
30 % are in the conception/development stage, 30 % in rater reliability) using KALPHA SPSS Macro developed by
maturity, 25 % in commercialization, and 15 % are in the Hayes & Krippendorff, (2007), alpha values equal or above
growth stage. The survey respondents are the owners or 0.667 confirms the reliability. From table 4, it is identified that
senior executives of the selected MSMEs who manage the the Krippendorff's alpha values of all the constructs are more
day-to-day activities of the firms. than the threshold values (Krippendorff, 2013).
The validity analysis verifies that the instrument measures
Reliability and Validity Analysis what it was designed to measure. The study analyzes the
The measurement statistics of the constructs are convergent validity and the discriminant validity of the scale
mentioned in Table 4. The Cronbach alpha coefficient is of analysis. The Mardia's coefficient value of the scale is
computed for all the factors to verify the internal consistency 12.236, and the critical ratio value of the measurement model
among the items. Cronbach’s alpha for all the factors is is 1.749, which is less than 1.96, thus confirming the existence
higher than 0.80 (ranging between0.813 and 0.928), which of normality in the data. The convergent validity of the scale
implies that all the factors are highly reliable (Hair et al., was established using standardized factor loading resulting
2006).In addition to the Cronbach alpha, the reliability of the from the measurement model.
Table 4
Measurement Statistics of Constructs
Factor Composite Krippendorff's Cronbach’s
Construct AVE
Loading Reliability alpha Alpha
Type of the firm (FA1) 0.850
Size of the firm(FA2) 0.645
Location of the firm (FA3) 0.582 0.826 0.671 0.906 0.570
Characteristics of the firm (FA4) 0.817
Stage of the enterprise (FA5) 0.839
Government Regulations (FO1) 0.879
High-Interest Rates (FO2) 0.836
Lack of knowledge about available schemes (FO3) 0.867 0.925 0.753 0.862 0.726
Collateral requirement (FO4) 0.837
Lengthy procedures & documentation (FO5) 0.841
Personal funds/ savings (SF1) 0.816
Government Schemes (SF2) 0.679
A loan from financial institutions (SF3) 0.807 0.894 0.703 0.813 0.607
The loan from Moneylenders (SF4) 0.738
Funds from IPOs (SF5) 0.843
Conception/ Development stage (LC1) 0.837
Commercialization Stage (LC2) 0.72
0.894 0.714 0.928 0.592
Growth stage (LC3) 0.713
Maturity stage / Expansion stage (LC4) 0.8
Loans offered without collateral security (AF1) 0.73
Affordable interest rates (AF2) 0.828
Loan guaranteed by government schemes (AF3) 0.862 0.908 0.706 0.846 0.619
Flexibility in repayment schedule (AF4) 0.766
Quick financing with simple documentation (AF5) 0.738
Increase in production volume (MF1) 0.938
Increase in Sales turnover (MF2) 0.847
Growth in profit (MF3) 0.886 0.854 0.683 0.877 0.725
Performance relative to competitors (MF4) 0.751
Overall business performance (MF5) 0.825

Table 4 reveals that all the latent variables mentioned in than 0.5, and converge to measure the specific latent
the model have an average variance extracted (AVE) value variable. The square root of AVE is measured to examine
of more than 0.5, which confirms that all the items under the discriminant validity of the research model.
each latent variable have a significant factor loading more
Table 5
Discriminant Validity
Variables 1 2 3 4 5 6
1. Firm Attributes (FA) (0.755) - - - - -
2. Financial Obstacles (FO) -0.432 (0.852) - - - -
3. Source of Finance (SF) 0.540 -0.082 (0.779) - - -
4. Life cycle of an MSME (LC) 0.316 -0.004 0.727 (0.769) - -
5. Access to Finance (AF) 0.591 -0.144 0.750 0.713 (0.787) -
6. MSME Performance (MF) 0.246 -0.087 0.374 0.342 0.446 (0.852)
Note: The values mentioned in parentheses “( )” are the square root of the AVE of the specific latent variable.

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

Discriminant Validity coefficient of all the items in each latent variable is more than
0.5, which indicates significant factor loading of all the items
Discriminant validity is the degree to which two in the respective latent variable and again proves the
conceptually similar concepts are distinct. The results of the convergent validity of the scale used in the study. All factor
discriminant validity of the scale are summarized in Table 5. loadings are positive and significant at the 1 % level.
All the latent variables mentioned in the table have a Table 6 presents model fit indices of measurement models.
correlation coefficient value less than the square root of AVE, As recommended by Kline (2010), measurement models with
which confirms the existence of discriminant validity of the increasing complexity (i.e. more number of latent variables)
scale. were compared. We have evaluated six measurement models.
Measurement Model From the above table, it is identified that six factor
measurement model is having comparatively good fit than all
The measurement model confirms the convergent validity the other five measurement models. Structural Equation
of all the underlying factors. The standardized regression Model (SEM).
Table 6
Model fit Indices for Measurement Models
Models χ2 df P χ2/df GFI CFI NFI RFI IFI TLI RMR RMSEA
One Factor
5194.319 377 <0.001 13.778 0.534 0.517 0.503 0.457 0.419 0.473 0.133 0.148
Model
Two Factor
3916.429 376 <0.001 10.416 0.572 0.567 0.548 0.431 0.586 0.547 0.118 0.102
Model
Three Factor
3216.429 374 <0.001 8.600 0.600 0.656 0.631 0.600 0.639 0.626 0.103 0.095
Model
Four Factor
3046.615 371 <0.001 8.212 0.708 0.774 0.749 0.716 0.775 0.743 0.097 0.082
Model
Five Factor
1990.761 367 <0.001 5.424 0.814 0.813 0.886 0.853 0.814 0.882 0.083 0.074
Model
Six Factor
1025.934 362 <0.001 2.834 0.969 0.940 0.908 0.925 0.940 0.920 0.067 0.051
Model

The SEM approach is used to examine the cause and Path Analysis Model
effect relationship between the independent variables (firm
The extension of the regression model is seen in the path
attributes, financial obstacles, sources of finance, and life
analysis (Figure 3), which indicates the kind of cause and
cycle of an MSME) on the dependent variable (access to
effect relationship between the selected variables. Among
finance) using maximum likelihood estimation. This study
the four independent variables of “access to finance”, the
also attempts to examine the impact of access to finance on
variable “sources of finance” has the highest standardized
MSME performance (i.e., outcome variable).
regression coefficient (0.673), whereas the variable “firm
The structural model depicts the relationship between the
attributes” has the lowest standardized regression coefficient
latent variables. Figure 2 represents the structural equation
(0.296) to the dependent variable (i.e., access to finance).
model which is the combination of a measurement model
All the variables (except financial obstacles) have a
and a structural model. The hypothetical relationships
positive impact on access to finance. Based on the regression
between the latent variables are depicted with their
coefficient values, it was found that the sources of finance
corresponding standardized regression coefficient value.
have the highest effect (0.673) on the MSME’s access to
finance, followed by the life cycle of MSME (0.352), and
firm attributes (0.296).

Figure 2. Structural Equation Model

Figure 3. Path Analysis

Figure 3 illustrates the path analysis model of the
research framework to emphasize the causal relationship
between the chosen variables.

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 K. Rajamani, N. Akbar Jan, A. K. Subramani, A. Nirmal Raj. Access to Finance: Challenges Faced by Micro, Small, and…

All the aforementioned variables are significant and Table 7 presents the regression weights of the SEM and
positive at the 1 % level. Financial obstacles have a strong the hypothesis testing results. From the above table and the
negative (-0.231) impact on the MSME’s access to finance, path analysis, it is clear that all the hypothetical relationships
which is significant at the 1 % level. mentioned in the conceptual model are significant at the 1 %
level.
Table 7
Regression Weights of the SEM
Std.
Path C.R. P Hypothesis Result
Estimate
Firm Attributes  Access to Finance 0.296 6.624 <0.001** Hypothesis 1 Significant
Finance Obstacles  Access to Finance -0.231 3.373 <0.001** Hypothesis 2 Significant
Source of Finance  Access to Finance 0.673 10.008 <0.001** Hypothesis 3 Significant
Lifecycle of MSME  Access to Finance 0.352 7.417 <0.001** Hypothesis 4 Significant
Access to Finance  MSME Performance 0.378 6.678 <0.001** Hypothesis 5 Significant
Note: ** significant at the 1 % level.

From the results, it is evident that firm attributes, more access to loans through government schemes; the
financial obstacles, sources of finance, lifecycle have MSMEs in the commercialization stage have more access to
significant effect on access to finance of MSME. On the loans from banks and other financial institutions, and the
other hand, access to finance has significant positive effect MSMEs in the growth or maturity/expansion stages have
on the performance of MSME. All these hypothetical access to finance from various sources based on their
relationships are significant at 1% level. reputation and financial stability.
The model fit indices of the structural model are Chi- The third most important factor, which has a positive
square/Degrees of Freedom (3.025), Root Mean Square influence on the MSME’s access to finance is firm attributes.
Error of Approximation (0.029), Root Mean Square A firm’s attributes enhance its access to finance because the
Residual (0.021), Goodness of Fit (0.915), Adjusted financial institutions or money lenders approve the loan after
Goodness of Fit(0.907), Comparative Fit Index(0.928), careful analysis of the various characteristics of the firm.
Tucker Lewis index(0.955), and Normed Fit Favorable firm attributes increase an MSME’s access to
Index(0.967).The most frequently used model fit indices of finance, whereas unfavorable attributes decrease the access.
the model are within the recommended values, hence, SEM Financial obstacles have a significant negative impact on
has an absolute fit. an MSME’s access to finance, because financial obstacles
prevent MSMEs from getting loans from financial institutions
Discussions or money lenders to meet the needs of their business (Naidu
& Chand, 2012; Pandula, 2011; Wang, 2016).
Timely access to finance plays a significant role in the Meanwhile, access to finance also has a significant
survival and growth of MSMEs. Federal (or state) positive impact on MSME performance. Ease access to
governments of many countries act as a major role in finance helps the MSMEs to grow faster and at par with the
offering assistance through various initiatives and schemes reputed companies in a highly competitive business
for nurturing MSMEs. environment. If the MSMEs have access to the required
The results revealed that the available sources of finance quantity of funds at the required time at a low-interest rate,
enhance the MSME’s access to finance. (Godke Veiga & in addition to fewer procedures, it would help them to meet
McCahery, 2019; Khan, 2015; Singh & Wasdani, 2016). For the financial needs of their business. Timely investments in
example, the availability of various sources of finance may the business will help the enterprise to rise from financial
help them to fulfill their financial need to manage the crises and fulfill its financial commitments (i.e., accounts
working capital, expand the business, or deal with any payables, interest payments, tax payments, etc.), purchase
unexpected financial crunch in the business. This may be raw materials to increase production based on sudden
through personal funds or loans from financial institutions unexpected demands, and expand its business.
or money lenders obtained in a short time with less effort,
thus directly enhancing their access to finance. (Bilal et al., Conclusion and Policy Implications
2017; GodkeVeiga & McCahery, 2019; Karedza et al.,
2014; Khan, 2015; Rocca et al., 2011; Singh & Wasdani, The extrinsic value of the results of this research is to
2016; Zelalem & Wubante, 2019). The model examined in provide empirical evidence about the impact of financial
this study provides a clear picture that the MSME’s access challenges in access to finance on the firm performance of
to finance is influenced by its attributes, the available MSMEs and to provide useful suggestions to improve its
sources of finance, and the life cycle stage it is in. performance, sustainability, and in the long run to reduce its
The empirical findings also revealed that the life cycle of failure rate in developing countries like India. The political,
MSME has a significant positive impact on access to economical, and technological environments of the one
finance. The need for the different sources of finance may developing country to another vary to a greater extent, which
vary according to the stage in which the MSME is in. Hence, also impacts its access to finance by the MSMEs, however
the second most important factor, the lifecycle of an MSME, apart from its environment the chosen variables (i.e. firm
because MSMEs in the conception/ development stage have attributes, financial obstacles, sources of finance, and the life

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

cycle of an MSME) also plays an important role in all the Innovative MSMEs need to be substantially strengthened so
developing countries (Ayadi & Gadi, 2013; Fowowe, 2017; that they can acquire funds from new sources such as angel
Jaroslav et al.,2017; Klonowski, 2012; Musamali & Tarus, investors, venture capital, and others (Anna, 2018).
2013; Phelps et al., 2007; Thampy, 2010; Zelalem & However, MSMEs in India are hesitant to get the necessary
Wubante, 2019) funds from risk capitalists who expect rising transaction
The results of this study stress the significance of access costs and problems with quitting such investments. Thus, the
to finance for the growth of emerging entrepreneurs, and it fiscal and regulatory obstacles should be removed so that
is also revealed that the negative impact of financial MSMEs can use these funds. MSME’s growth has been
obstacles and the positive impact of firm attributes on access affected by several challenges due to the current
to finance. Coronavirus pandemic as well. The government's decision
Consequently, the policymakers in India should find of a lock-down to deal with Covid-19 has affected this sector
ways to eliminate or minimize the financial obstacles in the very badly. Therefore, MSME has attracted considerable
near future, so that MSMEs can access finance easily, attention from the policymakers in the wake of this crisis
irrespective of their attributes and life-cycle stage, to bridge with the announcement of several packages under the
the credit gap. Though many schemes have been introduced Atmanirbhar Bharat Abhiyan (Self-reliant India movement).
by the government of India to bridge the credit gap, the gap Many of the measures announced are to ease the liquidity
is still widening because of the information asymmetry constraints. Although such initiatives are a ray of hope for
between MSME and financial institutions. the MSME market, the government should introduce more
The policymakers should take initiatives to simplify the plans to safeguard the interests of this distressed business
procedures and also demand only the most relevant and community.
minimum number of documents to verify the identity,
credibility, and financial position of the entrepreneur and the Limitations and Future scope of Research
company. They should also reduce the processing time of
loans to promptly fulfill the financial needs of the This study has a few limitations. Firstly, the small sample
entrepreneur. Though the Government of India has launched size (i.e., 400) may not be sufficient to explore the prevailing
many initiatives like MSME support and outreach program, conditions of MSMEs concerning their access to finance and
their impact has been very limited. MSME associations need its impact on the performance of firms in various cities (and
to play a key role in the dissemination of information about states) in India. Therefore, an exhaustive study with a larger
the various schemes to enhance and expedite their adoption. sample size could be conducted to cover a higher number of
The creation of tools and applications that could disseminate MSMEs located in other cities/states of India. Secondly, the
knowledge about the schemes and their simplicity of use in study has covered MSMEs located in urban areas only,
real-time as well as the communication of scheme-related whereas the situation of access to finance in rural areas may
information through SMS and WhatsApp is very important. significantly vary from urban areas. Hence, a comparative
MSMEs could consider Non-bank sources of finance for study could be conducted in the future to identify any
their development. Few of the alternative sources of finance significant difference between MSMEs located in urban and
suitable for MSMEs are asset-based finance, alternative rural areas concerning the accessibility of finance.
debt, hybrid instruments, and equity instruments. However, Thirdly, this study has considered only a few factors that
all of these sources may not be appropriate for all may have an impact on access to finance. However, there are
enterprises, because it depends on the firm’s risk-return many other factors such as the demographic profile of the
profile, stage in the business life cycle, size, scale, entrepreneur, entrepreneurial competencies and
management structure, and financial skills. It is important to orientations, financial performance of the company, market
appraise small and medium-sized enterprises' promoters of potential, brand image, and reputation, etc. Thus, future
the long-term sustainable growth advantages of SME studies may be conducted to explore the impact of these
listings and how they will lead to growth prospects. variables on access to finance.

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Authors’ Biographies
K. Rajamani is Associate Professor of Management Studies at Mepco Schlenk Engineering College, Sivakasi. Her
academic qualification includes MBA (Finance), [Link] in Management and Ph.D. in Business Administration. She also
completed Post-Doctoral research on “Finance for Micro, Small and Medium Enterprises – Sources and Challenges” at the
State Bank Institute of Leadership (Apex institute of State Bank of India). Her areas of interest are financial services, capital
market, corporate finance and international finance. She has published over twenty research papers in various national &
international refereed journals. She has also presented her research papers at both national and international Conferences.
N. Akbar Jan is working as an Assistant Professor in the HR&OB Department, ICFAI Business School, The ICFAI
Foundation for Higher Education, Hyderabad, India. He has completed his PhD in Management studies from Anna
University, Chennai, India. He has 18 years of teaching experience and five years of industrial experience. He has published
17 articles in international journals (including 12 papers in Scopus indexed journals), and presented several papers at
international and national conferences. He is also a recognized research supervisor of Anna University, Chennai. His area
of research interest is human resource management and operations management. He has received ‘Teaching and Research
Excellence Award’ from Grabs charitable trust, India.

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 Inzinerine Ekonomika-Engineering Economics, 2022, 33(1), 73–85

A. K. Subramani is working as an Associate Professor and Head in St. Peter’s College of Engineering and Technology,
Chennai, India. He has completed PhD in Business Administration in Manonmaniam Sundaranar University, Tirunelveli,
India. He has 15 years of teaching experience and published 53 articles in international journals (including 10 in Scopus
indexed journals). He presented many papers in international conferences and national conferences. His area of research
interests are human resource management, organisational behaviour and operations management.
A. Nirmal Raj is a Professor of Management Studies at Saveetha Engineering College, Thandalam. His academic
qualification includes MBA, [Link] in Management and Ph.D. in Business Administration. Presented papers in national and
international conferences and chaired various sessions of conferences. A trained Entrepreneurship ecology builder with a
vigour and spirit to handhold start-ups adding fuel is the Fund received from Department of Science and Technology (DST)
worth 2.87 crores to set up New Gen Innovation and Entrepreneurship Development Centre (IEDC).
The article has been reviewed.
Received in November 2020; accepted in February 2022.

This article is an Open Access article distributed under the terms and conditions of the Creative
Commons Attribution 4.0 (CC BY 4.0) License ([Link]

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