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MSME Sector: Framework for easing credit flow on the anvil

MSME Sector

As against the MSMEs’ demand of Rs 26 lakh crore of loans, credit availability is only Rs 11.10 lakh crore with majority of such enterprises depending upon informal sources of financing.

With the micro, small and medium enterprises (MSMEs) facing acute shortage of credit availability, the Reserve Bank of India is planning a number of steps to improve the situation including setting up a movable credit registry, accreditation of credit counsellors for small entrepreneurs and creating Electronic Bill Factoring Exchanges for faster payment of bills. As against the MSMEs’ demand of Rs 26 lakh crore of loans, credit availability is only Rs 11.10 lakh crore with majority of such enterprises depending upon informal sources of financing.

There is still a huge unmet demand for credit for MSMEs. There is a total finance requirement of Rs 32.5 trillion (or Rs 32.5 lakh crore) in the MSME sector, which comprises of Rs 26 trillion (or Rs 26 lakh crore) of debt demand and Rs 6.5 trillion (6.5 lakh crore) of equity demand, RBI Deputy Governor SS Mundra said at a conference on MSME Funding organised by the CII on Tuesday.

As per provisional data for period ended March 2016, total outstanding loan of the banking system to MSME sector stood at around Rs 11.1 trillion (Rs 11.1 lakh crore) in 20.6 million loan accounts. Contrast this to the estimated need of Rs 26 trillion (Rs 26 lakh crore) and number of MSMEs at 51 million, he said.

Indian MSME sector is a network of 51 million enterprises providing employment to 117.1 million persons and contributing 37.5 per cent of India’s GDP, as per MSME Ministry’s annual report for FY16.

In order to ease flow of credit, the RBI is starting to put in place a framework for accreditation of credit counsellors who are expected to serve as facilitators and enablers for micro and small entrepreneurs.

Since MSMEs are typically enterprises with little credit histories and with inadequate expertise in preparing financial statements, credit counsellors will assist the borrowers in preparing their project reports and also help banks make better informed credit decisions, Mundra said.

The RBI would also issue final guidelines for Peer to Peer (P2P) lending. New players have entered MSME lending landscape in form of P2P companies, and these entities use an online platform to match lenders with borrowers to provide unsecured loans and mostly for receivables financing, Mundra said.

P2P lending has great potential as an alternative form of low-cost finance as it can reach to the needy where formal sources are unable to reach or unwilling to lend. RBI has been mindful of a need to regulate these entities without stifling their ability to innovate and is currently in the process of issuing final guidelines on P2P lending, he said.

Highlighting the lack of collateral as an impediments towards lending to small enterprises, Mundra noted that the setting up of a movable assets registry, which when mature would have a multiplier effect in lending to the sector. Movable assets, as opposed to fixed assets such as land or buildings, often account for most of the capital stock of private firms and comprise an especially large share for micro, small and medium-size enterprises. The movable assets registry has been set up by the CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) in coordination with the government and the RBI.

For faster payment of bills to MSMEs, he said, the RBI has licenced three entities for operating the Trade Receivables Discounting System (TreDS), which would commence operations in the current fiscal. The system would facilitate the financing of trade receivables of MSME enterprises from corporate and other buyers, including government departments through multiple financiers.

He said it would be important that the use of TReDS is made mandatory for, to begin with corporate and PSUs and later for the government departments. The objective ultimately is to create Electronic Bill Factoring Exchanges, which could electronically accept and settle bills so that MSMEs could encash their receivables without delay.

To increase formal lending facilities to the MSME sector, the RBI has given licence to 10 entities for small finance bank that would mainly focus on lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities. These small finance banks have been mandated to extend 75 per cent of its adjusted net bank credit to priority sectors, while at least 50 per cent of their loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

Non-performing assets

Mundra said the pace of formation of new non-performing assets (NPAs) has decelerated although some banks have posted losses for the first quarter of the current financial year due to higher provisioning. Most of the banks are adequately capitalised and the government has promised additional capital if needed. The government last month announced infusion of Rs 22,915 crore capital in 13 lenders including SBI.

When I look at individual results, there are number of banks for whom it appears that the worst is over but then there are other banks…still they are in middle of it and they would need to do some work before they get out of it, he said. It would be naive to believe that there won’t be any NPA formation but the pace of new NPA formation has clearly decelerated, that is what the major trend is, he added.

Gross NPAs of the public sector banks had surged from 5.43 per cent (Rs 2.67 lakh crore) of advances in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.


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