New Delhi, Jan 29 (KNN) With the Union Budget around the corner, the Micro, Small & Medium (MSME) Sector awaits reforms in the Banking and Finance Sector to ease and improve access to finance.

Federation of Indian Micro and Small & Medium Enterprises (FISME)- a national federation of MSMEs, is expecting the Finance Minister to streamline processes and address the standing demands of the sector.

“We appreciate that the Union Budget for 2024-25 is going to be an interim budget because of General Elections in April this year. But we do expect that the Finance Minister can take steps to remove impediments such as requirement of BLR rating, support for accessing equity, abolishing pre-payment charges, strengthening of the Banking Ombudsman and implementing replacement of Bank Guarantees by Insurance Surety already announced by her last year,” said Prashant Patel, President, FISME.

“Lack of competition in the Banking sector (75 per cent of banks being public sector) and weak regulatory institutions which have not been very successful in ensuring customer centeredness of banks and a near defunct grievance redressal mechanism (Office of Banking Ombudsman) all coalesce into an unhappy experience for an ordinary MSME owner with the Banks- whether private or public,” highlights FISME communique.   

Mounting a scathing attack on the continuance of the practice of foreclosure charges & non-compliance charges by banks, FISME says that because of hefty foreclosure charges, changing a bank becomes difficult for MSMEs even if dissatisfied by the existing bank.

The charges range from 2~4 per cent and are used as a coercive tool to force an MSME to stay put. 

According to FISME, the Ombudsman scheme has also failed to provide justice to hapless MSME borrowers as it is not mandatory for Ombudsman to deliver reasoned/ speaking orders. Because of which most cases are summarily dismissed or decided arbitrarily without giving reasons.

“The continuance of mandatory Bank Loan Rating (BLR) is the classic case of confusion created by lack of clear guidelines by the RBI. While RBI insists that BLR rating is not mandatory, different banks demand a rating from a specific rating agency without which they downgrade the rating of borrowers,” FISME adds. 

MSMEs that are suppliers to the Government have been demanding replacement of Bank Guarantees by Insurance Sureties. The announcement regarding this was made by the Finance Minister in the 2022-23 Budget; however, the implementation of the decision is still pending.

FISME has consistently highlighted the global practice of furnishing BGs through Insurance Companies which neither insist on margin money nor demand collateral security but charge for usance period. 

To expand access to credit, FISME has asked to bring in competition in Credit Guarantee markets for MSME loans. It has suggested that large Indian corporates and international financial institutions should be invited to set up Credit Guarantees of many hues: region specific, sector specific (manufacturing/ services), technology specific (green), etc.

“The competition will make Credit Guarantees customer-centric and more aggressive in reaching out to segments hitherto underserved,” says President of FISME. 

FISME has also sought support for raising equity through market making at SME exchanges 

Most MSMEs in India fail to grow into large organisations due to their inability to raise equity. Among its peers, India has the lowest number of SMEs listed on exchanges. One of the biggest challenges is market making.

FISME has demanded that a specific fund needs to be created for market making of listed SMEs. Banks may be asked to contribute a 5th of their MSME portfolio as well as institutions such as LIC.

(KNN Bureau)