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In this article,
we would discuss about MSMEs at length and look at the central bank’s initiatives to increase loan disbursal to such enterprises.
Advising banks to boost lending to micro, small and medium
enterprises (MSMEs), the Reserve Bank of India has shed light on why the segment
is a safer bet than large corporations. RBI Deputy Governor S S Mundra spoke at
length on this subject during the launch of the National Mission for Capacity
Building of Bankers for financing MSMEs in Pune on August 7.
Mundra urged banks to be sensitive towards the growth needs
of their MSME clients and develop innovative products suitable to their seasonal
requirements for working capital and capital expenditure purposes.
Contribution of MSMEs
·
MSMEs contribute to nearly 8 percent of the
country’s GDP, 45 percent of the manufacturing output and 40 percent of the
exports.
·
MSMEs develop a diverse range of products and
services to cater to local markets, the global market and the national and
international value chains. There are
467.56 lakh enterprises in this sector providing employment opportunities to
1061.52 lakh across India (largest share of employment after agriculture).
Why does the RBI favour the MSME sector?
The Deputy Governor stated that the most potential segment
for the credit growth is the MSME sector.
He said that while the gross NPA number from loans given to
MSMEs might be bigger as compared to loans to large corporates, cases of
restructuring are quite less, thereby resulting in lower overall stress. Thus, for
banks to be in existence and attain the growth envisaged, this sector cannot be
ignored.
Mundra also said that there is a “very strong business
case for the banks to grow their MSME book.” Banks can develop a strong
lending book with decent margin, in order to increase profitability and
viability.
Why are banks reluctant
to lend to MSMEs?
Earlier in 2014, Kalraj Mishra, Union Minister of Micro,
Small and Medium Enterprises stated that banks’ reluctance to lend to MSMEs would
deter growth of scores of small entrepreneurs. Despite the provision of
collateral-free loans, banks don’t sanction loans and cause distress to small
entrepreneurs, ignoring RBI guidelines, he had said.
Though, MSMEs provide a strong potential for growth and are
part of priority sector lending, the inherent fear among bankers to lend to
the sector is due to problems relating to collateral, KYC and recovery, say
experts.
Banks regard MSMEs to be high-risk and profits from lending
to MSME’s as unattractive. Absence of requisite financial documentation makes
it difficult for banks to assess customers’ financial standing.
RBI’s efforts to
encourage MSME lending
·
To sensitise and upskill bank officials dealing
with MSME financing, the RBI has launched National Mission for Capacity
Building of Bankers for financing MSME Sector (NAMCABS). Reserve Bank’s College
of Agricultural Banking (CAB) will be the nodal institution coordinating
efforts for the mission’s success.
·
Broad objectives of this programme are to
develop skills and entrepreneurial sensitivity for MSME lending among the field
level functionaries of commercial banks’ specialised MSME branches. Over 4500
officials dealing directly with MSME lending are expected to be trained through
this initiative in one year.
·
The mission will be implemented in four stages:
a)
CAB to train vertical heads of MSME divisions in
commercial banks
b)
CAB to train trainers in commercial banks’ regional
training centres
c)
RBI’s regional offices to work towards capacity
building of branch managers of specialised MSME branches.
d)
Regional training centres of commercial banks to
work towards capacity building of staff of the specialised MSME branches.
Trade
Receivables Discounting System (TreDS)
·
Another initiative of the central bank to make
life easier for MSMEs is to set up Trade Receivables Discounting System
(TreDS), which Mundra asserted will be accomplished soon.
·
Trade receivables are money owed by buyers to
MSMEs in exchange for goods/services that have been used or rendered, but not
yet paid for. These are documented as invoices, bills of exchange, etc.
·
MSMEs grapple with delayed payment from their
buyers (mostly large corporations). As this drastically reduces their working
capital and next cycle of production, the aim of TreDS is to create an
institutional mechanism to facilitate conversion of trade receivables into
liquid funds with the help of multiple financers.
·
TreDS would enable faster monetisation of
receivables, thereby lowering production costs for MSMEs.
·
At present the RBI has received seven applications
for setting up TReDS.