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09/12/2013 08:01pm

56% supply-demand gap for MSME credit

image 56% supply-demand gap for MSME credit
Mumbai, Dec 9 (KNN)  The gap between demand and supply of bank credit for the MSME sector is a huge 56 per cent in the fiscal 2013-14 but may come down to 43 per cent in the coming years, as per the RBI projections.

According to the report of the Private Sector Investment for MSME Sub Group under Working Group for the 12th Five Year Plan (2012-2017), the estimated outstanding credit demand and supply gap of MSMEs will be 56 per cent in 2013-14 at Rs 15,66,089 crore.

Meanwhile, in 2016-17 the gap will be of 43 per cent at Rs 16,33,111 crore.

Even when the demand-supply credit gap would come down, it would still remain at 41 per cent high.

“Banks need to urgently step up lending to micro, small and medium enterprises (MSMEs) to bridge the wide gap between credit demand and supply in the sector, which is crucial for the economy,” said RBI.

In the absence of alternate source of funding for the sector, the role of banks is very crucial in bridging this funding gap, it said.

The RBI further suggested that the banks need to have a proper business plan and delivery model that would harness the benefits of technology.

“This would help in planning product delivery and building lasting customer relationships which will translate into higher revenues. The costs of banking transactions need to be dramatically reduced just as in so many other fields such as telecom, after the advent of technology,” RBI said.

The statistics compiled in the Fourth Census of MSME sector revealed that only 5.18 per cent of the units (both registered and unregistered) had availed of finance through institutional sources, 2.05 per cent had finance from non-institutional sources and the majority of units i.e. 92.77 per cent had no finance or depended on self-finance.

“It is deplorable that despite recognizing a widespread need for supporting the sector, the progress on the ground is extremely lacklustre and the extent of financial exclusion in the sector (MSME) is very high,” RBI added.

The ability of MSMEs (especially those involving innovations and new technologies) to access alternate sources of capital like equity finance, angel funds/risk capital is extremely limited.

According to the RBI data, at present, there is almost negligible flow of equity capital into this sector, which poses serious challenge to development of knowledge-based industries, particularly those that are promoted by first-generation entrepreneurs with the requisite expertise and knowledge.

“Venture /Risk capital is, therefore, often a more appropriate financing instrument for high-growth-potential and start-up SMEs. However, access to this type of financing is often not available to them,” RBI said.

In the absence of alternate sources of finance, the SMEs’ reliance on debt finance is very high.

RBI further appreciated the criticality of the sector in terms of its contribution to employment generation, manufacturing and exports, and acknowledged the importance to ensure that lending to the sector is appropriately stepped up. 

Thus the apex bank suggested that the banks can quickly conduct appraisal of SME loan proposals without expending too much resources, which would be imperative to ensure the efficiency of the appraisal process.

With a view to expediting the flow of credit to the MSE firms, RBI, as a proactive measure, issued guidelines in May 2009, advising banks to start using scoring models for making lending decisions in case of all advances up to Rs 2 crore.

“However, despite, our instructions having been issued nearly five years back, we find that use of credit scoring model in the real sense has not really taken off in India. Our assessment is that perhaps the lack of conceptual clarity on the subject could be one of the reasons for banks’ reluctance in using the credit scoring model for making MSE lending decisions,” the apex bank said.

Credit scoring is a statistical technique that combines several financial characteristics to form a single score for assessing a borrower’s credit worthiness.

The use of credit scoring models can go a long way in facilitating lending decisions by reducing costs and increasing service levels, which can deliver great benefits for both the lenders and MSE borrowers, the country’s Central bank added.

RBI recognized that the sector contributes to economic development in a variety of ways such as creating employment opportunities for rural and urban population, providing goods and services at affordable costs by employing innovative solutions and supporting the export initiatives of the country.

“In fact, it is increasingly being recognized by the policy makers that if India has to regain its high growth trajectory, it needs a vibrant MSME sector,” it said. (KNN/SD)
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