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Demonetisation Affected MSME Credit Growth

rbiA Reserve Bank of India (RBI) study said that demonetisation negatively affected the credit growth of the Micro Small and Medium Enterprises (MSME) sector. The implementation of the Goods and Services Tax (GST) did not greatly affect the overall credit to MSMEs.
The RBI conducted the study to assess the credit dynamics and export performance of MSMEs through a study “How have MSME sector credits and exports fared?” This study reports the MSMEs credit growth has recovered since the late 2017 to reach the mid-2015 level. Lending to MSMEs,
including by banks and non-banking financial companies (NBFCs) show a healthy trend of growth. The GST implementation has appeared to affect MSME exports after demonetisation. It mainly affected payments from employers towards labour as demonetisation placed constraints on most transactions. The introduction of GST led to higher compliance costs and other costs as many MSMEs were brought under the tax net.
According to a World Bank report, demonetisation and GST implementation reportedly affected manufacturing and construction sectors too, but both are recovering to reach their pre-demonetisation aera.
The study said demonetisation and GST are expected to be beneficial in the long run, with growth in digitisation, and enhanced ease of doing business and creation of a database of transactions that would help better access to finance, thereby improving the long-term growth prospects of the MSME sector.
The study also noted that the inability of MSMEs to access timely and adequate finance has been the greatest obstacle.

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