Govt Considers Proposal For New Bank To Increase MSME Credit Penetration

In an attempt to provide hassle free loans to develop Micro, Small and Medium Enterprises (MSMEs) in the country, the government may establish a dedicated bank to serve the MSMEs and stimulate economic activity, promote job creation and address direct credit shortages.

“A separate bank which understands the needs and the working of the MSMEs is required,” said Sandip Kishore Jain, President of the Federation of Indian Micro and Small & Medium Enterprises. He added that large banks do not understand the requirements of the MSMEs and in some European countries they are clubbed together with home loan customers as both are small borrowers.

The bank may function under the hybrid ownership of public-private partnership.

The Small Industries Development Bank of India (Sidbi) currently provides large refinance to banks lending to MSMEs, to reduce the cost of finance to these units. Among others, MSME sector receive direct loans from state financial corporations and state industrial development corporations.

An EY report stated that compared with 50 per cent MSME credit penetration in the US and 37 per cent in China, India only has 14 per cent penetration, with a credit gap of Rs 25 trillion that reflects the large untapped credit market. Limited access to affordable and timely financing is a significant obstacle hindering the growth of MSMEs as they strive to become larger enterprises.

The credit to the MSMEs at the end of December 2023 by scheduled commercial banks increased by 20.9 per cent annually to Rs 26 trillion.

The Indian economy is dependent on the 64 million-strong MSMEs for over 110 million jobs accounting for 23 percent of the country’s labour force, making it the second-largest employer in India after agriculture. They contribute 27 per cent to India’s GDP, 38.4 per cent of the total manufacturing output and 45 per cent of the country’s total exports.

The President of the All India Association of Industries, Vijay G Kalantri, stated that Sidbi should be converted into a full-fledged bank for direct lending to MSMEs instead of focusing on just refinance. Kalantri also suggested that MSMEs should be given loans at the same interest rate as housing, i.e. at the rate of six per cent for exports and eight per cent for regular domestic production activities. Currently, he said the bank interest rate for MSMEs is 11-13 per cent and eight to nine per cent for exports. He outline that MSME credit, as a share of their output, has declined to around 8.3 per cent from 12 per cent earlier.

Sidbi was established in 1990 under the special Act of Parliament 1988. Presently, the Government of India, with its 20.85 percent, State Bank of India with 15.65 per cent, Life Insurance Corporation of India with 13.33 per cent and National Bank for Agriculture and Rural Development with 9.36 per cent shares are its majority shareholders.