RBI Ready To Ease Flow Of Credit To MSMEs, Says Mundra

Reserve Bank of India Deputy Governor S S Mundra has said micro, small and medium enterprises (MSME) sector is a nursery for entrepreneurship and a school for innovation as it creates more employment opportunities and is also crucial for the agenda of financial inclusion.

"For bridging the information asymmetry on the MSME borrowers side, RBI is initiating a process for putting in place a framework for accreditation of credit counsellors who are expected to serve as facilitators and enablers for micro and small entrepreneurs," Mundra said at the 2nd national conference on MSME funding organised by the Confederation of Indian Industry (CII).

"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," he added.

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.

On Tuesday (23 August), Mundra released a CII-Crisil report on how MSME acceptance of ratings must be encouraged as such ratings bring significant benefits to small enterprises as well as funding institutions.

According to the report credit ratings can boost financial discipline, disclosure and governance practices among MSMEs, thereby reducing lending risks. Good ratings enhance the acceptability of the rated units in the market and provide them access to quicker and cheaper credit.

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.

"New players have entered the MSME lending landscape in form of P2P companies. 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.

"These entities use an online platform to match lenders with borrowers to provide unsecured loans and mostly for receivables financing," he said.

The report has recommended stronger incentives to be offered in addition to funding for MSME to undertake rating, greater transparency in information sharing should be mandated for MSME, trade bodies should popularize MSME ratings with awareness sessions, MSME ratings should be made mandatory for banks considering loans and banks should encourage their unrated MSME clients to obtain ratings.

The report prepared by CII and Crisil also highlights steps that MSME should undertake to improve ratings, including more comprehensive information, capacity building, deepening product portfolios, and improving compliance and quality controls, among others. According to the report, credit ratings provide several tangible and intangible benefits to various stakeholders.

“Credit ratings can boost financial discipline, disclosure and governance practices among MSMEs, thereby reducing lending risks. Good ratings enhance the acceptability of the rated units in the market and provide them access to quicker and cheaper credit,” said Shreekant Somany, chairman, CII National SME Council.