Need To Accelerate Climate Finance For Greening Of MSMEs In India 

MSMEs in India are unable to properly access formal banking system

Climate change has already hit India hard, causing huge economic and social losses in recent years. As per IPCC’s sixth Assessment Report, in the future decades, India will see more frequent and intense heat waves, extreme rainfall events, and irregular monsoons, as well as increased cyclonic activity. According to the Overseas Development Institute (ODI), if the average global temperature rises by 1 degree Celsius, the resulting decline in agricultural productivity, rise in sea levels, and negative health outcomes are expected to cost India about 3 per cent of its GDP. Researchers determined in a study in The Lancet Planetary Health journal that anomalous hot and cold temperatures linked to climate change cause roughly 740,000 more fatalities in India each year. 

In India, it is essential to measure the impact of climate change in reference to the Micro, Small, and Medium Enterprises (MSMEs), as it is one of the largest contributors to Indian GDP. The Indian MSME sector is the backbone of the country's economy, and it has consistently served as a shield for the Indian economy, enabling it to withstand global economic shocks and adversity. Many experts argue that MSMEs are perhaps the least prepared to supplement the investment needs for making their business and technology on low carbon pathways. As per reports, with around 63.4 million units throughout the country, MSMEs contribute approximately 6.11 per cent of the manufacturing GDP and 24.63 per cent of the GDP from service activities, as well as 33.4 per cent of India's manufacturing output. They have been able to provide employment to around 110 million persons and contribute around 49 per cent of the overall exports from India. For these reasons, it becomes extremely essential to measure the impact and adaptation of the small and medium scale industries to climate change. 

According to a study conducted by Center for Study of Science, Technology and Policy (CSTEP), the informal sector, which is mostly made up of MSMEs, utilised 13 per cent (81 million tonnes or mt) of coal and lignite, 7 per cent (8.5 mt) of petroleum products, and 8 per cent (3.3 billion cubic metres) of natural gas supplied in India in 2015-16. Due to the use of fossil fuels, this sector released 110 MnT CO2 (110 million tonnes of CO2 equivalent) in 2015–16. Further, as per estimates, MSMEs account for nearly 48 per cent of the energy consumed by the industrial sector in India. 

MSMEs are not only contributing to climate change; but are also impacted by its adverse impacts. Due to changes in temperature, fluctuating rainfall, and other physical variables, climate change has an impact on MSMEs in both manufacturing and infrastructural activities. Floods are a common occurrence in the manufacturing units as a result of rising temperatures and sea levels. The industry faces a number of obstacles, including a lack of resources such as adequate prediction meters, storage facilities, and financial credit. The industry is also affected by indirect impacts on the supply chain, regulatory changes, and demand shifts. 

Further due to climate change, MSMEs are suffering from dual risks, physical risks (damage to infrastructure and assets such as buildings and factories, as well as to people and communities) and transitional risks (policy changes, reputational impacts, and shifts in market preferences and technology).  

MSMEs and Climate Finance 

It has been observed that only around 16 per cent of MSMEs, are being financed by the formal banking system in India. Most MSMEs are unable to qualify due to stringent rules and regulations. Given that climate finance in India flows mainly through formal financing structures with stringent rules and regulations such as Union Budgets, State Budgets, national climate funds and National Adaptation Fund, private climate finance and international climate finance, MSMEs fail to qualify due to very stringent qualification criteria of these mechanisms and institutions. International climate finance institutions and facilities such as the GCF require applications from a dedicated accredited entity or a qualified financial institution working with an entity accredited by the GCF, to propose approaches that deploy financial solutions for MSMEs. 

They are also unable to access dedicated international and national climate funds. A number of mechanisms and programmes, including those supported by the World Bank, and others, have been successfully implemented to bring the benefits of climate finance or development finance to MSMEs, specifically to assist them in making the transition to modern, energy-efficient technologies. However, owing to a variety of factors, including the demand of an initial investment, procedural requirements such as the compilation of thorough project reports, energy and emission audits, MSMEs' involvement in these programmes has been restricted.  

Financial institutions access climate finance from GCF or other such sources and then deliver it onwards. This does not work for MSMEs, as a majority of NBFCs or MFIs who are the main providers of finance to MSMEs are either not eligible (due to stringent eligibility criteria) or find it very difficult to access climate finance.  Overall, there is a need to develop a mechanism that enables climate finance to reach MSMEs proactively. 

Plan For MSMEs 

At this stage, it is extremely important to institutionalise structures and mechanisms and assist MSMEs in acquisition of technologies that lower their emission footprints and reduce their vulnerability to climate change. MSME sector requires adequate strategies, both in adaptation i.e., adjusting to current and future effects of climate change and mitigation by making the impacts of climate change less severe by preventing or reducing the emission of greenhouse gases (GHG) into the atmosphere. 

There is a need to strategically plan, access, mobilize, disburse, and track climate finance, particularly for the MSME sector, at the level of states through an independent nodal agency. This agency can be an independent statutory body with the mandate to coordinate an overall climate finance strategy in states, in line with the NAPCC, SAPCCs, and national development plans at the National level. 

The agency may be tasked with executive and advisory functions. The executive function may be performed by a committee of high-level representatives from government agencies and line Ministries and Departments at the National, State, and Municipal levels to monitor the implementation of India’s national climate finance strategy. Further, the advisory function may be performed by technical experts who may provide advice on various aspects such as policy, technology, finance, best practices undertaken in other regions and countries, among other key aspects. The executive and advisory wings may be supported by a team of dedicated staff to provide the key governance and secretariat functions for the agency. This body will be important to ensure the day-to-day implementation of the climate finance strategy for MSMEs.  

Moreover, it is also important to leverage the network of existing financial institutions and build their capacities to guide MSMEs through the loan application and disbursement process. These institutions are among the most important stakeholders in delivery of climate finance to MSMEs and therefore it is critical to leverage them effectively and optimally.  

The year 2023 has been a year that has provided opportunities to India to promote international cooperation across various key areas, through its G20 Presidency. It will therefore be in India’s interests to enhance its readiness of greening of the MSME segment and promote meaningful dialogues and measures to enhance the sustainability of micro, small and medium enterprises that are vulnerable to climate change.  

(Author is Managing Director at Primus Partners. Views expressed here are personal)

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