Asia Small and Medium-Sized Enterprise Monitor 2021: Volume I—Country and Regional Reviews

By Asian Development Bank

The Asia Small and Medium-Sized Enterprise Monitor provides data and analysis as a resource for evidence-based policy design. This year's edition focuses on South Asia. This first volume reviews micro, small, and medium-sized enterprises (MSMEs) at the country and regional levels. It covers Bangladesh, India, Nepal, Pakistan, and Sri Lanka, and examines MSME development, access to finance, and policies and regulations. It notes that revitalizing MSMEs by channeling more growth capital to them will be key to a resilient economic recovery from the pandemic. It highlights opportunities in formalizing MSMEs and connecting them to international markets, expanding digital skills, fostering technology-based start-ups, and supporting youth and women entrepreneurs.

• Language: English
• Publisher: Asian Development Bank
• Release date: Dec 1, 2021
• ISBN: 9789292691752

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South Asia

Regional Review

Summary

As a region, South Asia is recovering from the impact of the coronavirus disease (COVID-19) pandemic—although speed varies by country given the uncertainty of new variants.² The Asian Development Bank (ADB) forecasts an 8.8% rebound in 2021 (led by India) after a 5.6% contraction in 2020.³

Like most, South Asian economies were hit hard by the pandemic, containment measures, and lockdowns. Economic growth in Bangladesh slowed to 3.5% in fiscal year (FY) 2020 (ended 30 June 2020) from 8.2% in FY2019. India’s economy contracted by 7.3% in FY2021 (ended 31 March 2021) from 4.0% growth in FY2020. Nepal’s economy contracted by 2.1% in FY2020 (ended 15 July 2020), well below the 6.7% growth in FY2019. Pakistan suffered a 0.5% contraction in FY2020 (ended 30 June 2020) from 2.1% growth in FY2019, while Sri Lanka’s economy contracted by 3.6% in 2020 after growing by 2.3% in 2019. The pandemic and ensuing lockdowns severely limited most economic activities, including micro, small, and medium-sized enterprises (MSMEs).

With large government stimulus packages, recovery began in 2021, although still below pre-pandemic levels. India’s gross domestic product (GDP) is forecast to grow by 10.0% in FY2022. Pakistan also expects a strong recovery, with 3.9% growth forecast for FY2021. A resilient Bangladesh economy grew by 5.5% in FY2021. Nepal is expected to grow by 2.3% and Sri Lanka by 3.4% in FY2021. However, the lockdowns and restrictions during the pandemic’s second wave remain the main downside risk for these forecasts.

MSMEs, including cottage industries, help drive the region’s economies. Based on the latest available data using national MSME definitions, these firms accounted for an average 99.6% of all enterprises, 76.6% of the total workforce, and 33.9% of GDP. They create jobs, stimulate domestic demand, and compete as a critical element of inclusive growth. Devastated by the pandemic, their recovery is critical for the region’s revival.

For the most part, MSMEs supplement domestic markets, with few involved in exports or international supply chains, although this varies by country. Many are informal or unregistered. In Bangladesh, 87% of manufacturers exclusively supply local markets. In Nepal, 85% of the workforce are informal workers. The majority of MSMEs are in services and operate in rural areas. Nonetheless, in India, for example, MSMEs contributed an average 47.0% of exports from FY2013 to FY2020, higher than the Southeast Asia average of 19.2% (2010–2020). Increasing market access and internationalizing MSMEs are core strategies under the national MSME development policies across South Asia. Governments are promoting MSME exporters as suppliers or lead firms in global value chains. Traditionally, MSMEs are low-tech, while there are some exceptions. Technology-based MSMEs and start-ups have grown as internet penetration increases and interoperable electronic payment platforms expand. E-commerce has rapidly expanded MSME markets.

Access to finance is a central policy goal for inclusive growth and MSME development. Limited access to financial services is a structural problem that seriously affected MSME operations as the pandemic intensified. Across South Asia, bank lending to MSMEs averaged just 7.0% of a country’s GDP during 2015–2019 (a compound annual growth rate [CAGR] of –0.04%) and 14.8% of total bank lending during 2015–2020 (a CAGR of –0.7%). The MSME credit market remains small but growing in Bangladesh (a CAGR of 9.7% in 2015–2020), India (8.6%), and Pakistan (9.6%).

Governments and central banks across the region offer various financial assistance options to MSMEs. These were strengthened further in response to the pandemic—interest rate subsidies, refinancing, credit guarantees, as well as mandatory lending (Nepal) and lending targets to MSMEs (Bangladesh and India). They contributed to MSME credit growth as the COVID-19 crisis developed. However, MSME nonperforming loan (NPL) ratios remain high—an average 13.6%, above the bank average of 8.8% during 2015–2020—if improving (–6.9% CAGR for MSMEs and –2.5% CAGR for gross bank NPLs).

Nonbank finance is gradually developing in the region and helps supply MSME working capital. Yet the industry remains small. Nonbank finance institutions (NBFIs) include microfinance institutions (MFIs), credit cooperatives, finance companies, and leasing and factoring companies. Among others, MFIs play a critical role in improving access to finance for rural MSMEs and small entrepreneurs. Nonetheless, NPLs are rising. During 2015–2020, NBFI financing accounted for an average 3.2% of a country’s GDP (4.9% CAGR) and 6.5% of total bank lending (-2.8%). The share of nonperforming financing to total NBFI financing averaged 5.6% and is rising (9.7% CAGR). Public microfinance programs (Bangladesh and Sri Lanka) have expanded in rural and poor areas.

Mobile financial services are rapidly expanding, backed by interoperable online payment platforms. The Aadhar digital identification system helps spread digital financial services across India. In Bangladesh, agent banking has grown steadily even during the pandemic and is increasingly popular in rural and remote areas. Mobile banking has also expanded in Nepal and Pakistan. Peer-to-peer lending and equity crowdfunding platforms are being tested through regulatory sandboxes in Pakistan. However, in Sri Lanka, digital finance remains the exception with cash still preferred.

Specialized SME equity markets with concessional listing requirements exist as growth capital financing venues for qualified small firms: in Bangladesh, there are SME platforms in the Chittagong and Dhaka Stock Exchanges; in India, there are the Bombay Stock Exchange’s BSE SME Exchange and National Stock Exchange’s NSE Emerge; in Pakistan, there is the Growth Enterprise Market (GEM); and in Sri Lanka, there is the Colombo Stock Exchange’s Empower Board. There is yet no dedicated SME board in Nepal, but the possibility is being examined. As SME markets remain relatively new in Bangladesh (launched 2019), Pakistan (2019), and Sri Lanka (2018), data on these markets are unavailable. Based on existing equity markets that firms (including MSMEs) can tap, market capitalization averaged 18.2% of a country’s GDP during 2015–2020 (–4.2% CAGR). Market size is small, but SME markets in India have grown rapidly since they opened in 2012 (67.4% CAGR in 2012–2020).

Governments have long-term MSME development frameworks, comprehensively covering financial and nonfinancial development in line with their national development strategies. In general, they seek a conducive business environment; access to market and finance; skills development; business clusters; increased use of technology; and offer assistance for groups such as youth and women entrepreneurships, start-ups, agribusiness, and internationalized MSMEs (to join global value chains). Cottage industries—small manufacturing and home businesses—are a critical segment of national MSME policies. They generally provide time-bound goals and action plans for developing appropriate business infrastructure (through business development services and capacity building) and financial assistance to MSMEs (through special funds or refinancing facilities, with interest subsidies and credit guarantees). The COVID-19 pandemic led governments to provide large-scale financial assistance to MSMEs to support them through lockdowns, maintain, and then reopen their businesses.

MSMEs are defined within the national policy frameworks in Bangladesh, Pakistan, and Sri Lanka, while they are stipulated by law in India and Nepal, leaving one national definition. However, there remain various MSME definitions used in statistics office, by central banks and line ministries in Bangladesh, Pakistan, and Sri Lanka. India has a dedicated MSME law that guides MSME development. This could be considered by countries with no legal framework on MSMEs to enhance effective support.

Developing national data infrastructure is key to MSME development and for evaluating evidence-based economic growth. In South Asia, MSME data infrastructure is not well established. A comprehensive, comparative MSME database covers both financial and nonfinancial conditions using periodic monitoring and analysis. It can identify timely assistance needs from MSMEs and better implement policy support. Long-interval census data and financially focused credit bureau and collateral registry data cannot fully capture the current state of MSMEs with any accuracy. To start, business registration must be strengthened to include currently informal MSMEs so their development can be monitored. It is also critical to use granular enterprise and cloud data for analysis. Intragovernmental coordination on MSME data sharing between central and local governments should be strengthened as well. Bangladesh pays attention to institutionalizing SME statistics under the SME Policy 2019.

Each country in this report has a comprehensive national financial inclusion strategy, formulated during 2015–2021. The strategies set core strategic goals and action plans on (i) digital finance and payments, (ii) financial literacy and education, (iii) consumer protection, and (iv) financial assistance for the traditionally unserved and underserved, including MSMEs, women entrepreneurs, and priority sectors such as agriculture. Bangladesh and Sri Lanka plan to create robust financial inclusion data for effective monitoring and for developing policies. Intragovernmental coordination between the central government and financial authorities generally works smoothly to implement and fine-tune policies.

Financial inclusion strategies are generally holistic but bank-centric. From a long-term perspective, more market-based financing (capital market development) is needed to provide qualified SMEs with sufficient growth capital. As mentioned, dedicated SME equity markets exist in Bangladesh, India, Pakistan, and Sri Lanka. But very few, if any, SMEs are listed and thus, few investors. Improving these markets would go a long way toward meeting the goals of national financial inclusion strategies. Bangladesh’s financial inclusion strategy mentions reinforcing capital market services for SMEs.

Across the region, each country acted quickly to contain COVID-19 infections and curb the pandemic’s impact on the economy. Large government stimulus—with spending from 2% to 16% of GDP—continues to support businesses and individuals affected by pandemic restrictions. The government assistance covers a wide range of measures, including liquidity support to financial institutions; debt restructuring (deferred debt payments); relaxed lending conditions (reduced interest through subsidies and caps); new lending to MSMEs and priority sectors (through refinancing facilities, special funds, and credit guarantees); and temporarily easing regulatory requirements (debt moratoria and NPL reclassifications). In addition, tax relief measures (reduced corporate income taxes) and employee income support (cash transfers) are provided to affected businesses, including MSMEs.

The pandemic accelerated the digital transformation of MSME businesses, and it continues to be a government priority. Formalizing the informal and opening up MSMEs to global are also priorities, along with developing youth and women entrepreneurships. Given the prolonged pandemic, government assistance should consider longer term and more balanced support for businesses hit badly—using more focused group assistance and a phased approach—and for growth-oriented firms and entrepreneurships—by channeling growth capital to them, without putting excessive stress on national budgets.

1. MSME Development

MSMEs in South Asia, 2020

GDP = gross domestic product; fiscal year = FY; MSME = micro, small, and medium-sized enterprise.

* India for FY2013–FY2020.

Reporting countries only. Data based on latest available data until 2020.

Scale of MSMEs

MSME definitions vary by country based on different criteria, such as number of employees, fixed assets, annual sales turnover, and paid-up capital (Table 2.1). MSMEs are also classified differently by sector (manufacturing and services in Bangladesh and Sri Lanka). Specific criteria are used in some countries (investment in plant and machinery or equipment in India, use of energy for microenterprises in Nepal, and operating period for start-ups in Pakistan). There are unified national definitions for MSMEs including cottage firms and start-ups stipulated in the national policy frameworks in Bangladesh, Pakistan, and Sri Lanka; or stipulated by law in India and Nepal. Nonetheless, there are other various MSME definitions used in statistics office; by central banks; and within line ministries in Bangladesh, Pakistan, and Sri Lanka. Moreover, national policies categorize MSMEs differently and even differ by institution. As a benchmark, cottage, micro, small, and medium-sized enterprises are categorized separately in Bangladesh and Nepal; micro, small, and medium-sized enterprises are used in India, by Pakistan’s central bank, and in Sri Lanka; start-ups, small, and medium-sized enterprises is the national definition used in Pakistan; while there is just one small enterprise category used by Pakistan’s Federal Board of Revenue. Obviously, this makes it extremely difficult to compile data, analyze, or even discuss MSMEs across and even within countries due to the lack of a standardized usage of MSME definition. This report nonetheless relies on country-specific definitions of MSMEs for comparative analysis as they are the benchmark for MSME policies. It uses MSME throughout, unless otherwise stated.

Table 2.1: MSME Definitions in South Asia

MSME = micro, small, and medium-sized enterprise; SME = small and medium-sized enterprise.

Source: Compilation from Country Reviews of Asia Small and Medium-Sized Enterprise Monitor 2021.

Regardless of how they are defined, MSMEs—including cottage firms—are an integral part of the region’s economy. Based on the latest available data through 2020, and using national firm classifications, MSMEs accounted for an average 99.6% of all enterprises.⁴ They dominate businesses even more than in Southeast Asia, which averaged 97.6% during 2010–2020.⁵ The number of MSMEs grew by 5.8% in India, 10.7% in Nepal, and 3.3% in Pakistan in terms of CAGR, again higher than in Southeast Asia (average 0.2% CAGR during 2010–2020) (Figure 2.1A).⁶

Figure 2.1: Number of MSMEs

BAN = Bangladesh; BRU = Brunei Darussalam; CAM = Cambodia; IND = India; INO = Indonesia; LAO = Lao People’s Democratic Republic; MAL = Malaysia; MSME = micro, small, and medium-sized enterprise; MYA = Myanmar; NEP = Nepal; PAK = Pakistan; PHI = Philippines; SA = South Asia; SE = Southeast Asia; SIN = Singapore; SRI = Sri Lanka; THA = Thailand; VIE = Viet