Govt Mulls Dedicated Banks for MSME Sector

New Delhi, Jun 24 (KNN) In a move aimed at boosting credit flow to the micro, small and medium enterprises (MSMEs), the Indian government is considering the establishment of a specialised bank dedicated to serving this vital economic sector.

This proposal comes as part of efforts to address the significant credit gap facing MSMEs and stimulate economic growth and job creation.

Currently, the MSME sector in India faces a staggering credit gap of Rs 25 trillion, with credit penetration at a mere 14 per cent compared to 50 per cent in the United States and 37 per cent in China.

The proposed bank would focus on direct lending to MSMEs, complementing the existing role of the Small Industries Development Bank of India (SIDBI), which primarily provides refinancing to banks lending to the sector.

An unnamed government official stated, "There is a need to set up a separate bank for the MSME sector to help address the direct credit shortages." The official added that while the proposal is under consideration, details such as the ownership structure are yet to be finalized, with a possible public-private partnership model being explored.

Federation of Indian Micro and Small & Medium Enterprises (FISME) has been. Raising the demand for a dedicated MSMEs Bank for quite some time.  

In a representation submitted to Ministry of MSME, FISME had said, “ A full commercial bank having branch network in all districts needs to be set-up or SIDBI could float the bank (like IDBI or ICICI floated commercial arms). The bank would offer full bouquet of financial services  (loans & working capital) and non-financial services (Bank Guarantees, Performance Guarantees etc.)”. 

“It could become a ‘default lead bank’ in all districts steering all centrally  driven schemes PMEGP, PMMY etc in close cooperation with DICs and district level associations. The Bank should create benchmark/ better practices for servicing MSMEs for replication by other banks”, it added.   

 The MSME sector, comprising 64 million enterprises, is crucial to India's economy, contributing 27 per cent to the GDP and employing over 110 million people. However, access to timely and affordable finance remains a significant hurdle for these businesses.

While bank credit to MSMEs has shown growth, expanding by 20.9 per cent annually to Rs 26 trillion as of December 2023, industry representatives argue that interest rates for MSMEs remain high at 11-13 per cent for domestic production and 8-9 per cent for exports.

They advocate for rates comparable to housing loans, suggesting 6 per cent for exports and 8 per cent for domestic activities.

As the government weighs this proposal, the potential establishment of an MSME-focused bank could mark a significant step in addressing the sector's financial needs and fostering its growth.

However, the success of such an initiative would depend on careful planning and execution to effectively bridge the existing credit gap and support the backbone of India's economy.

(KNN Bureau)