SPIPA-study on Enhancing Climate Resilience Financing for MSME Sectors

SPIPA-study on Enhancing Climate Resilience Financing for MSME Sectors

A study on “Enhancing Climate Resilience Financing for MSME Sectors” was prepared as part of the project Strategic Partnerships for the Implementation of the Paris Agreement (SPIPA) funded by the European Union (EU) and the Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV). The SPIPA project had the Ministry of Environment Forest and Climate Change as the nodal ministry and was implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ India), in close cooperation with the Delegation of the European Union to India. 

MSMEs contribute about 30 percent of India’s GDP and about 48 percent of exports. The sector employs around 111 million people. The Government of India has designed various policies and schemes for the growth of MSMEs in the country sector-wise. In India, MSMEs are concentrated mainly in ten states. Nearly 93 percent of enterprises come from these ten states. Uttar Pradesh has the largest number of estimated MSMEs with a share of 14.20 percent of MSMEs in the country. It is estimated that there are around 4500 MSME clusters in India of which around 1300 are industrial, i.e., having large, medium, small, and micro enterprises and around 3000 are artisanal clusters of handicrafts and handloom manufacturers consisting mostly of OAEs and around 200 services clusters.   

The scope of the study included: 

  • Assessment of the vulnerability of MSME sector in India to various impacts of climate change (Short/Near term (NT), Medium term (MT), and long term (LT)),
  • Stocktaking of existing and emerging adaptation solutions in India and EU relevant for MSME sectors in India,  
  • Stocktaking of the status of climate resilience financing for adaptation solutions for MSME sector in India and EU, and
  • Providing recommendations for enabling climate resilience financing for MSME sector in India by taking advantage of proven examples from EU that are relevant to India. 

Vulnerability Assessment of MSME sector in India to climate change through Stakeholder Consultation:

There is increasing evidence that climate change poses severe risks for Micro, Small and Medium Enterprises (MSMEs). Infrastructural damage, regulatory uncertainties, financial risks, market fluctuations, supply chain disruptions and reputational damage are some of the potential risks posed by climate change to MSMEs. 84 micro enterprises, SMEs from 18 states, MSMEs from 36 districts and 41 clusters belonging to 12 AEZs were interviewed. The interviewed sector was mostly from 3 identified sectors, processed food sector (32 per cent), tourism (29 per cent) and textiles (39 per cent).

  • Heat stress, excessive rainfall, floods, and storms/cyclones were identified as top threats.
  • There is a lack of knowledge about the impact of climate change and financing among MSMEs and financial institutions among banks.
  • Instruments for climate finance adaptation in MSMEs are very limited.
  • It emerged from the study that mostly, the food processing and textile sectors are vulnerable, because these sectors are dependent on the raw materials belonging to the agriculture sector, which is one of the most climate sensitive sectors. The Travel and Tourism sector is also another highly vulnerable sector as it is climate dependent.

Some key recommendations highlighted in the study include:

Climate Adaptation options for MSMEs:

  • Awareness of climate change and the need for adaptation measures are required to be created for enterprise owners and potential entrepreneurs of MSMEs.
  • Preventing flood damage by making embankments and installing an early warning system.
  • Reduce the impact of a heat wave by installing green roofs, evaporative cooling and air conditioning.
  • Ensuring ecosystem health by restoration and reviving of wetlands, watershed ecosystems and mangroves.
  • Dealing with disasters by mapping the hazards and hazard prone zones, by installing early warning systems in place, and by demarcating the evacuation routes and establishing shelters.

Finance Sector:

  • There is a need to support and nurture organizations and agencies involved in innovation, structuring and technological research on climate change/climate finance.
  • There is a need to expand the Priority Sector list to include all climate related finance.
  • De-risk climate finance by providing a safety net to banks and financial institutions.
  • Measuring climate related risks - modifying the Rating Models- This will bring uniformity and accuracy in the measurement of climate related risks while risk-rating the climate finance projects or investments.
  • Promoting Blended Climate Finance- The blending can be of various instrument types, ranging from grant to concessional finance, and subsidy to hybrid or convertible financial instruments, coupled with a commercially priced loan.

The study highlights that the survival of MSMEs is highly dependent on reducing the impacts of climate change. There is an urgent requirement to make MSMEs aware of government schemes and policies. Government/ policymakers could consider holding discussions with financial institutions, climate experts and MSME associations to formulate the vision document and roadmap for policies/schemes to meet the requirement of climate resilience financing.

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