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(Articles Covered - Accessing Finance - A challenge for MSMEs & Encouraging environment for small Enterprises)
Accessing Finance - A challenge for MSMEs
There is a consensus that MSMEs face enormous hurdles in accessing finance everywhere. Almost 90% of the MSMEs are dependent on informal sources for funding.
Supply Side Constraints
• Banks are required to lend 40% to ‘Priority Sector’. The Priority sector constitutes of Agriculture having a sub-target of 18%. There is no specific sub-target for MSMEs within the priority sector lending. MSMEs are bracketed with the sectors which bankers find more lucrative and easier to lend such as housing and education. • For MSMEs where promoters could be first generation entrepreneur, bankers try to minimise their risks by insisting on asset based collateral securities for lending. Potential MSME promoters not having asset based collateral are excluded. The Bankers lack the technical expertise necessary to appreciate sectoral complexities • India’s adoption of Basel-II norms and future plan for Basel III norms had made lending to MSMEs even more difficult as MSMEs being classified as risky entities have to pay an extra premium over their interest rate thereby making formal credit costly. • RBI asked banks to get their exposure above Rs. 5 crore to be rated through credit rating agencies. It also mandated banks to adopt Special Mention Account (SMA), where even a 30 day deviation on payment against principal or interest needs to be reported. It is the MSMEs that bore the brunt of all these measures. • Tight control of govt on PSU banks the most powerful players in banking system results in subdued competition and sub optimal outcomes both for the owners and the customers of the bank. • In case of failure of a financed business entity , banker find it difficult to take possession of stressed assets inspote of a no. Of legislative remedies available on paper. Hence they are wary of lending to MSMEs • Long Term Finance is not available to suit the long gestation period of an enterprise
Demand Side Constraints • The micro enterprises are largely informal and unorganised. It faces financial inclusion challenges owing to its informal nature, lack of information needed by banks and documents. • Their major problems are lack of sufficient collateral and high working capital needs as their payments are delayed by their buyers.
Policy Response
Way Ahead There is a need to create a revolution similar to telecom in banking sector creating conditions where the service providers chase the clients. The govt will have to exit from banking and cede space to private sector to create massive competition.
Finally the push for digitalization post demonetization and imposition of GST will fundamentally transform the conduct of business as the commercial transaction get illuminated leaving a verifiable trial. The massive amount of information which is likely to be generated through GSTN should make information based collateral more lucrative than asset based ones turning the traditional banking on its head.
By: Deepak Hooda ProfileResourcesReport error
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