Asset-based Lending Approach By Banks Results In Exclusion Of MSMEs: RBI Dy Gov

New Delhi, Aug 22 (KNN) Reserve Bank of India (RBI) Deputy Governor Swaminathan J addressed the financial hurdles faced by micro, small, and medium enterprises (MSMEs) in a recent speech, emphasising the limitations of traditional banking practices in serving these businesses.

Speaking at the annual day of the Foreign Exchange Dealers Association of India on Monday, Swaminathan pointed out that many small businesses lack sufficient assets to use as collateral for loans, particularly for working capital needs.

This asset-based lending approach, commonly employed by banks, often results in the exclusion of smaller enterprises from formal banking sector funding opportunities.

The Deputy Governor's remarks, which were made available on the RBI website on Thursday, shed light on several key issues affecting MSMEs.

He noted that many of these enterprises operate in the informal sector, creating information asymmetry that makes it challenging for lenders to accurately assess their creditworthiness.

Swaminathan also highlighted the problem of delayed payments, which frequently extends the operating cycles of small businesses and impacts their ability to fulfil orders or secure new business.

This issue is compounded by the reluctance of MSMEs to invoke existing statutory provisions that penalise late payments.

According to the Deputy Governor, this hesitation stems from their weak bargaining position and fears of losing future business opportunities.

These observations underscore the complex challenges faced by small businesses in accessing formal financial services and managing their cash flows effectively.

Swaminathan's speech brings attention to the need for innovative approaches to address these longstanding issues in the MSME sector, which plays a crucial role in the country's economy.

(KNN Bureau)