MSMEs' access to formal bank financing hurt due to asset shortage: RBI DG

It is challenging to assess the creditworthiness of small enterprises, says Swaminathan J

Small businesses in the country often don't have sufficient assets to offer as collateral for their working capital needs, said Swaminathan J Deputy Governor at the Reserve Bank of India (RBI), noting how formal banking may exclude such enterprises.

Swaminathan gave a speech on micro, small, and medium enterprises (MSMEs) on Monday and it was uploaded on the RBI website Thursday.

“Banks often use asset-based lending, which relies on collateral rather than cash flow. However, many MSMEs lack adequate assets for collateralisation, particularly for working capital needs, often leaving smaller businesses excluded from funding opportunities from the formal banking sector,” he said at the annual day of the Foreign Exchange Dealers Association of India.

MSMEs operate in the informal sector, making it challenging to assess their creditworthiness due to information asymmetry, especially regarding their financial performance.

Payments are "commonly delayed", extending MSMEs' operating cycles and diminishing their ability to fulfill orders or secure new ones. “Despite the existence of statutory provisions which entail penalties for delayed payments by buyers, MSMEs often refrain from invoking these provisions. Their reluctance stems from a combination of weak bargaining power and the fear of losing future business opportunities,” he said.