Large industries make MSMEs' cash flow lumpy, says RBI Dy Governor Gandhi
Updated: Jun 16, 2014 04:11:17pm
Kolkata, Jun 16 (KNN) MSMEs often act as ancillaries to large industries which affect the cash flow of the micro, small and medium enterprises making such flows lumpy, RBI Deputy Governor R Gandhi has said.
Delivering an address at the ICC Banking Summit here last week, Gandhi said, “There is also an oft-heard complaint from bankers that MSMEs are often quite lackadaisical when it comes to settling their dues. It needs to be recognised that MSMEs often act as ancillaries to large industries, and their cash flows are lumpy. The business orientation of large industries often affects the MSMEs directly, in turn hampering the recycling of funds and business operation of MSME units.
“Banks need to take a proactive view, carefully analysing the linkages of the MSME units, when sanctioning funds. The existing provisions of the Interest on Delayed Payment Act, 1998 for these entities have been suitably modified taking on board their unique characteristics. In addition, banks have been advised to sanction separate sub-limits within the overall limits sanctioned to the corporate borrowers for meeting payment obligations in respect of purchases from MSME sector”.
Gandhi said Parliament has passed the Factoring Regulation Bill that is expected to address delays in payment and liquidity problems of micro and small enterprises. “I am sure that these measures will contribute in no small measure towards alleviating the extant constraints that plague this sector”.
He said in 2011-12, the sector accounted for a significant proportion of manufactured output and over 12 per cent of our GDP. In addition to their strong export orientation, they also have a strong employment potential, providing bread- and butter to nearly 100 million people, perhaps next only to the agricultural sector.
With a big chunk of them being located in rural areas, it also offers tremendous potential for rural development. Given their forward and backward linkages with the corporate sector, I view them as "silent" engines of growth, especially in slow economic cycles.
Numerous studies have documented that, given the lack of reputation and tangible collateral, debt financing, mostly from informal sources, comprises the primary source of external funds for these entities. Given the often onerous documentation requirements for banks, these entities tend to get a raw deal when it comes to bank finance. The Fourth Census of MSME revealed that only 5.2 per cent of the units (both registered and unregistered) had availed of finance through institutional sources; the majority of units - 93% of them in fact - had either no finance or depended on self-finance. A World Bank Enterprise Survey in 2011 also reinforces these conclusions. The moot point is that the credit flow to MSMEs from institutional sources is not commensurate with the economic activity undertaken by them. (KNN Bureau)
Delivering an address at the ICC Banking Summit here last week, Gandhi said, “There is also an oft-heard complaint from bankers that MSMEs are often quite lackadaisical when it comes to settling their dues. It needs to be recognised that MSMEs often act as ancillaries to large industries, and their cash flows are lumpy. The business orientation of large industries often affects the MSMEs directly, in turn hampering the recycling of funds and business operation of MSME units.
“Banks need to take a proactive view, carefully analysing the linkages of the MSME units, when sanctioning funds. The existing provisions of the Interest on Delayed Payment Act, 1998 for these entities have been suitably modified taking on board their unique characteristics. In addition, banks have been advised to sanction separate sub-limits within the overall limits sanctioned to the corporate borrowers for meeting payment obligations in respect of purchases from MSME sector”.
Gandhi said Parliament has passed the Factoring Regulation Bill that is expected to address delays in payment and liquidity problems of micro and small enterprises. “I am sure that these measures will contribute in no small measure towards alleviating the extant constraints that plague this sector”.
He said in 2011-12, the sector accounted for a significant proportion of manufactured output and over 12 per cent of our GDP. In addition to their strong export orientation, they also have a strong employment potential, providing bread- and butter to nearly 100 million people, perhaps next only to the agricultural sector.
With a big chunk of them being located in rural areas, it also offers tremendous potential for rural development. Given their forward and backward linkages with the corporate sector, I view them as "silent" engines of growth, especially in slow economic cycles.
Numerous studies have documented that, given the lack of reputation and tangible collateral, debt financing, mostly from informal sources, comprises the primary source of external funds for these entities. Given the often onerous documentation requirements for banks, these entities tend to get a raw deal when it comes to bank finance. The Fourth Census of MSME revealed that only 5.2 per cent of the units (both registered and unregistered) had availed of finance through institutional sources; the majority of units - 93% of them in fact - had either no finance or depended on self-finance. A World Bank Enterprise Survey in 2011 also reinforces these conclusions. The moot point is that the credit flow to MSMEs from institutional sources is not commensurate with the economic activity undertaken by them. (KNN Bureau)
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