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258 viewsAll GS PapersGS Paper 3
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Approach:

  1. Introduction – contribution of MSME sector & brief intro.
  2. Defining climate finance, point out the credit gap.
  3. Mention the major impediments to access climate finance.
  4. Way forward.

The MSME sector contributes around 30% to India’s GDP, and employs around 120 million people. But at the same time, it generates around 110 MT of CO2 equivalent. This sector uses 13% (81 MT) of total coal/lignite, 7% (8.5 MT) of petroleum products and 8% (3.3 billion cu.m.) of the natural gas supplied in India in 2015-16.

The MSME sector needs a push to adopt new technologies that quickly minimize its C-footprints and make it less vulnerable to climate change risks. This can be achieved with the aid of climate finance – traditional funds cannot help the sector to become decarbonized.

Climate Finance: Climate finance is the money paid by developed countries to developing countries to help them take emission reduction-mitigation measures and adaptation.

the MSME sector faces a huge credit gap. According to a study by IFC in 2018, the credit gap was found to be around $37 billion (2010) and reached more than $330 billion in 2017. In 10 years, the gap compounded annually at 37% rate. The overall debt demand of this sector is more than $88 billion of which only 16% is catered by the formal financial institutions.

Climate finance will enable transfer of technology & expertise from developed to developing nations, which require resources to combat climate change at the rate that the world demands.

Challenges in Accessing Climate Finance:

  • MSME lacks knowledge of how their business can profit from climate finance by lack of awareness & financial literacy.
  • Only 16% MSMEs can access formal banking system imposing a major barrier.
  • No comprehensive procedure to avail international climate funds. Many small & micro-businesses cannot implement these since they lack the means & ability.

Way forward:

  • Financial needs require innovation like incentives & blended-based financing to achieve low-carbon pathways.
  • Revamping digital finance
  • Reducing complexities to access finance by connecting more institutionalized financial credit system.
  • Accelerated aspects of decarbonization like cleaner fuel, common combustion facilities, and energy efficiency technologies.
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