RBI Deputy Governor Highlights Measures to Strengthen MSME Lending

Mumbai  :  N S Vishwanathan, Deputy Governor of Reserve Bank of India, inaugurated FIBAC 2018, India’s largest conference on banking, organised jointly by Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ Association (IBA), on Monday August 20. The theme of the two-day conference is Financial Services to SMEs in an Increasingly Digital Ecosystem.  In his inaugural address, Vishwanathan highlighted the importance of the MSME sector. “The MSME sector plays an important role in any economy, and India is no exception,” he said. Recognising their role as providers of employment and generators of export, the Government and RBI have taken affirmative measures to strengthen the sector. And in order to ensure that the larger entities within the sector do not crowd out the smaller ones, the banks have been given specific targets to address the latter group. 

Among the measures highlighted by the Deputy Governor was the mandate to banks to provide a fixed percentage of their lending to this sector. RBI has introduced the Trade Receivables electronic Discount System (TReDS) to address delays in recovery. Steps have been taken to strengthen the credit bureaus. And it is work in progress to formulate legal amendments to address the ever-expanding data pool and how it can be used by the financial sector players for credit assessment. 

“But problems in MSME are not just financial alone; there are several other areas that they need support from,” he said. He pointed out that credit to the sector has grown. “Bank advances to the MSME sector have clocked an impressive year-on-year growth of 8.9% during the first quarter of ’18-’19. This indicates that the credit flow to the sector has turned robust.” Financial inclusion through NBFCs has been enabled by fintechs and artificial intelligence. 

Vishwanathan also highlighted some regulations pertaining to capital requirements for systematically large financial institutions that are too big to fail. Their financial resilience is being strengthened with higher and better quality capital; and there is a move towards reduction in model risk that had created the problem of under-capitalisation, towards standardised approaches. RBI has also put in place a framework to contain the probability of failure of large banks. He informed that this is an ongoing process and will keep undergoing improvements. He also touched upon the need for additional capital for the domestic systematically important banks in India. 

Rajnish Kumar, Deputy Chairman, IBA and Chairman, State Bank of India, also addressed the gathering. “SMEs are a major vertical for all banks,” he averred. They are an important segment of the Indian economy, with their growth potential and capacity to generate employment. But they face challenges in accessing institutional credit. Some of the reasons for this are their lack of credit history and high risk perception. There are a large number of unregistered enterprises. He revealed that recent policy developments have addressed many of these concerns. 

Supply chain financing is now replacing traditional methods of underwriting loans. Banks are exploring many of these options, Mr. Rajnish Kumar informed. Many banks have developed models for flow based lending. “GST is one of the most important reforms which will formalise the economy and bring SMEs into the formal sector, and enable greater flow of institutional credit to this sector,” he observed. 

Saurabh Tripathi, Senior Partner and Director, The Boston Consulting Group, knowledge partners for the event, made a presentation on the theme of the conference and explained the content of the knowledge paper. He presented a case study to underscore the silent revolution taking place in financing MSMEs. The latter can now pay their bills online ; as a result, their financial transactions can be reflected in their bank statements. This can enable a bank to assess their credit-worthiness. “The reverberations will be felt in SME finance in India over the next three years,” Mr Tripathi predicted. It is not a theoretical concept. “India, which has the world?s most advanced payment system, deserves to have this.”

Rashesh Shah, President FICCI and Chairman and CEO, Edelweiss Group, earlier delivered the welcome address. Mr. Shah said, “Timely availability of credit has been the biggest issue for MSMEs. For long credit was not democratised but over the last 10 years there has been an evolution of information bureaus and an important role played by rating agencies. With massive digital footprints being created we are looking at a dramatically changed scenario now. Technology will play a big role in the rapid evolution of the credit ecosystem over the next 5-10 years and is expected to transform the Indian economy.”

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