Financial institutions should deploy measures to help MSMEs: RBI dy guv

Restructuring, grace periods and tailored repayment plans can be used as tools, says Swaminathan

Financial institutions should look at deploying supportive measures, including restructuring options, grace periods and tailored repayment plans, to help micro, small and medium enterprises (MSMEs) recover and get back on track while encountering difficult situations, Reserve Bank of India (RBI) deputy governor Swaminathan J said on Thursday.

Speaking at the annual day of the Foreign Exchange Dealers’ Association of India (FEDAI), Swaminathan said the financial sector should adopt a more sensitive and empathetic approach towards MSMEs, given the important role they play in the economy.

“While financial discipline is crucial, the unique challenges faced by MSMEs — such as low capital base, lack of scale, cash flow constraints from delayed payments, fluctuating market conditions and external economic pressures — necessitate a more nuanced approach to assessment as well as follow-up”, he said, adding that collaboration and dialogue between lenders and borrowers can help create solutions that protect both financial interests of the lender and viability of MSMEs.

This comes amid the government encouraging banks to provide collateral-free loans to small businesses and offer additional loans during times of financial stress in the Union Budget this year.

Swaminathan highlighted that MSMEs have limited access to affordable finance since they lack adequate assets for collateralization, particularly for working capital needs, and banks often use asset-based lending, which relies on collateral rather than cash flow. Also, since many of these entities operate in the informal space, assessing their creditworthiness becomes difficult due to lack of financial information of their businesses.

As more MSMEs adopt digital payment systems, mobile banking and online accounting tools, their expanded digital footprint allows financial institutions to gather more accurate and comprehensive data on their financial health, transaction history and cash flow patterns. This enhanced data should enable better risk assessment and development of customized financing products, opined Swaminathan.

In his speech, the deputy governor also highlighted that delays in receiving payments, infrastructure bottlenecks and high compliance costs are among the major challenges plaguing the MSME sector.

He highlighted that on its part the RBI has taken steps to promote innovation in financing to MSMEs, including the initiation of Trade Receivables Discounting System (TReDS) in 2014 to facilitate financing of trade receivables. “While there has been an uptick in transactions in the last couple of years, there is a long way to go in onboarding by more corporate buyers and MSME sellers on the platform to reap its full potential. The RBI is engaging with the government on this aspect,” he said, adding that bankers should leverage their corporate relationships to encourage larger corporates to get themselves onboarded on the TReDS platform.

Further, he said that the financial sector can play a vital role in providing capacity-building programmes tailored to the needs of MSMEs, including training on financial management, understanding credit and forex products and using digital tools effectively. Additionally, he said that the financial sector can also play a crucial role in boosting MSME exports by offering targeted support and tailored services, including aiding them in managing risks through export credit insurance and currency risk hedging solutions.