S S Mundra: Bankers & SME borrowers - the emerging mantras
Keynote address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at the 3rd
Bankers Borrowers Business Summit, organized by the Associated Chambers of Commerce
and Industry of India (ASSOCHAM), New Delhi, 16 June 2017.
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Dignitaries on the dais; distinguished colleagues from the banking fraternity; members of
ASSOCHAM; representatives from the print and electronic media; ladies and gentlemen! At the
outset, I would like to compliment ASSOCHAM for the effort in bringing the bankers and the
borrowers together on a common platform to enable discussions on various issues of relevance
to the MSME sector. With changing times new trends are emerging in every sphere and at this
juncture the theme of "10 Emerging Mantras" for the MSMEs is extremely topical.
2. The role of micro, small and medium enterprises (MSMEs) in the economic and social
development of the country can hardly be over-emphasized. About one-third of the country's
GDP is contributed by more than 50 million MSMEs in the country. It is expected that by 2020,
India will have the largest job-ready youth population in the world. However, before I get into
specifics on the theme of the Summit, let me first present the big picture on why MSME sector
needs our support.
3. First and foremost reason is that with big manufacturing companies increasingly automating
their operations and process flow, the number of jobs in these industries is going to decline. A
recent research based on World Bank data has predicted that the proportion of jobs threatened
in India by automation could be around 69 per cent! That is a huge number. Since MSMEs are
capable of generating plenty of jobs in segments like hospitality, apparel manufacturing, food
processing and so on, it is time for the policy makers as well lenders to focus on them. In this
context, there would also be a need for change in our perception about jobs. Work created in the
formal sector alone does not constitute job. Even if entrepreneurship is promoted that also is
equivalent to creation of a job. Hence, the public policy should focus on how much more work is
created rather than how many jobs in the formal sector.
4. The motivation for the bankers to lend to the MSME segment would probably come from
relatively poor return on their advances to the large corporates. Still another push emanates from
recent regulatory guidelines restricting banks' exposures to single borrowers or borrowers in the
same corporate group and forcing the large borrowers to meet their fund requirements from
market borrowings rather than from banks. Under the circumstances, it would make sound
commercial sense for the banks to look at MSME sector as a potential growth area.
5. Therefore, with favourable ecosystem in the manufacturing/services sector, MSMEs can pave
the way for fulfilling entrepreneurial ambitions and in the process would be able to generate
significant levels of employment. Yet providing adequate and timely finance at reasonable rate of
interest to these 50 million units at the bottom of the pyramid has remained an elusive goal. It
must be appreciated that to realize the country's aspirations for a double-digital growth, it is
crucial that the potential of MSME sector is optimally tapped.
6. Before coming to the theme of the Summit proper, let me briefly touch upon few major
reasons for the sector's limited access to institutional credit. These include - small ticket size
loan which renders these accounts operationally less profitable, lack of information about the
operations of these enterprises and financial illiteracy among the small enterprise owners. Due to
unavailability of timely as well as flexible institutional credit, a number of MSMEs fail to tide over
temporary setbacks and eventually have to shut shop. With the above background, in my
address today I intend to outline some mantras for the bankers and the borrowers that need to be
pursued for ensuring vibrancy of the MSME sector in emerging environment. I will also dwell upon
few recent policy measures that RBI and Government of India have taken for the sector and also
some measures in the pipeline.
Mantras for bankers
7. In my opinion developing empathy for micro, small and medium borrowers and understanding
their financial and other related needs is the first and foremost mantra for the bankers. This can
obviously be achieved if the Top Management is convinced about the potential of the sector and
treats MSME lending as a priority for sound commercial reasons. Developing business sensitivity
towards such entrepreneurs would require focused capacity building through training
interventions.
a) Appreciating the Life cycle needs of the MSMEs
Micro and small units are more prone to financial difficulties than large enterprises / corporates.
Often absence of timely support at crucial junctures during the operating lifecycle of MSMEs
leads to their sickness. The banks need to be sensitive in providing continuous support to viable
MSEs during phases of transient financial difficulties. Towards this end, Reserve Bank of India
has already advised banks to review their lending policies to the MSE sector and incorporate
provisions for sanctioning of Standby Credit Facility, Additional Working Capital Limits, Mid Term
Review of Regular Working Capital Limits and to set timelines for credit decisions. However, a
crucial piece for the success of the endeavour would be execution. Banks need to put in place a
strong oversight mechanism over the field level functionaries for ensuring compliance with the
policies. I believe this is crucial for vibrancy of the MSMEs.
b) Supporting faltering MSMEs
Let us recognize that failure is integral to entrepreneurship. Unfortunately, however, failure of
enterprises in our system is still not accepted graciously without attaching any stigma. While
providing support to the MSME firms over their life-cycle is important, it is also crucial that the
banks support the firms in distress. An enabling mechanism has already been created by the
GOI and RBI has issued necessary guideline outlining a Framework on Revival and
Rehabilitation of MSMEs under temporary duress. Under the Framework, problem resolution is
scaled up to a committee with a time bound schedule. I am told that all public sector, private
sector and 4 major foreign banks have put in place an internal policy. Until December 31, 2016,
1770 committees have been formed and 41417 cases have been referred to these committees
during the period between July-December 2016. In my opinion, these numbers need to go up
substantially and resolution reached. Supporting MSME firms in temporary distress is extremely
important and hence, I would request my banker colleagues to support this initiative earnestly.
c) Focusing on industrial clusters
By providing shared access to amenities like testing centers, utilities, roads, security, training to
workers, and marketing assistance, SME clusters provide substantial benefits in terms of
technology absorption, efficiency enhancement and growth. Firms in the MSME sector which
earlier faced difficulties in achieving economies of scale, specialization and innovation due to
their small size are now increasingly benefitting from the advent of industrial clusters. Several
regional organizations have taken up cluster-based projects to promote smaller firms and this is
where lies an opportunity for the banks. RBI has already advised banks to open more MSE
focused branch offices at MSE clusters which can also act as counseling centers for MSEs.
Collaborating with SME association in these clusters can prove mutually beneficial for the banks
as well as for the smaller firms.
Mantras for borrowers
8. a) Bridging information asymmetry
One thing that seriously ails the MSME entrepreneurs is large-scale ignorance about banking
products & practices as also a lack of awareness about the unfolding economic environment.
Under the circumstances, the first mantra for the borrowers is to develop awareness about the
changing economic dynamics and its impact on their businesses. The borrowers must make
efforts to be updated with the latest regulatory guidelines, schemes offered by the banks and also
by the Government. In this context, I am not sure how many MSMEs are aware about the
existence of BCSBI Code of Bank's Commitment to Micro and Small Enterprises. We often
observe many small entrepreneurs using innovative and ingenious techniques of production
within their enterprise but I am not sure how many of them have heard of intellectual property
rights (IPRs), let alone making a filing for their unique technique. It is also ironical that in a country
where creating jobs is of utmost priority, vocational training still continues to be relatively
neglected area owing to social perception. I firmly believe that entrepreneurial skill development
by imparting vocational training can solve the problem of unemployment to a large extent and the
industry bodies like ASSOCHAM would have a significant role to play in handholding and capacity
building of the new entrepreneurs in all the above areas.
b) Reaping digital dividend
Fintech revolution is sweeping the globe and creating immense opportunities for various sectors.
It has also opened new opportunities for the banks in the MSME space. Banks can support SMEs
as they embrace e-invoicing or mobile payment solutions to allow their customers to make
purchases on the go. With the aid of technology there can be a paradigm shift in the approach in
lending to MSMEs. The banks can collaborate with Fintech players for either lending directly or
through these fintech companies. On the other hand, the MSMEs can adopt technology for
scaling up their businesses, achieving operational efficiencies and thereby cutting costs. Data
analytics can help the bigger MSMEs to better appreciate customer behaviour and fine-tune their
products, processes and services accordingly. I foresee a role for the Industry associations here
as they can help create an infrastructure which can be shared by the resource-starved MSMEs
thereby helping them prune down their costs.
E-commerce has disrupted the way businesses have traditionally been conducted. E-commerce
technologies have the potential to significantly increase productivity gains at firm level as they
allow automation of common processes such as distribution, sales, after-sales service and
inventory management. E-Commerce has also virtually opened the entire globe for the entities to
market their wares. So, instead of competing against large multinational companies, the MSMEs
can take advantage of the opportunities afforded by e-commerce to access new and distant
markets or global value-chains.
c) Utilizing alternate sources of finance
The MSMEs have always lamented lack of institutional finance as an impediment to their growth.
However, lately few alternate sources of finance have become available in the market as a
supplement to bank credit. The common forms of alternative finance include crowd-funding,
Invoice trading, Peer-to-peer or marketplace lending, Angel investors etc. Similarly, NSE has a
SME platform for entities whose post issue paid up capital is less than or equal to Rs.25 crores.
The platform allows new, early stage ventures and small companies to raise much needed
growth capital as they grow and mature. Alternative finance tend to be more transparent about
fees and eligibility as well as flexible in terms of payment. Alternative finance allows businesses
to use different assets for security. This is particularly very handy for service industries that can
secure loans against the value of their unpaid invoices, rather than tangible assets such as
property or stock. Spreading awareness about the availability of these alternate sources of
finance however, remains a challenge which must be addressed by the Industry Associations.
d) Seeking credit rating
A credit rating can make a MSME unit's access to financial services more efficient as it provides
transparency, helps overcome perceived uncertainty in lending decisions and thereby reduces
time and transaction costs. MSMEs can use ratings to enhance their credibility with other
counterparties too, such as technology providers, suppliers, and customers. In this context,
having proper documentation would be extremely critical. A related aspect that the lenders need
to be mindful of is that MSME is a vast universe comprising of several million micro enterprises
without elaborate system of account-keeping. Hence, standard ratio analysis would be an
ineffective mode while apprising their credit proposals. In such cases, the banks would need to
look to assess their credit worthiness under a credit scoring model using unconventional matrix
comprising of utility bill payments, remittance history etc. I would like to add here that adoption of
Ind-AS will play a key role in enhancing the quality of ratings as better disclosures will increase
information availability on rated companies.
Recent policy measures/Work-in progress
9. The regulators and policy makers have an equal responsibility for supporting the cause of
MSME sector. It is pertinent however to mention that the regulators/policy makers are better as
enablers rather than doers. Whether it is creating avenues for flow of finance to the sector,
creating easy climate for doing business or assisting the firms in distress- both Government of
India and RBI have been extremely conscious to the needs of the MSME sector.
a) Smoothening the flow of finance
(i) Trade Receivables and Discounting System (TReDS)
RBI's initiative on creating a TReDS platform to serve as an exchange for electronically
accepting and settling bills to enable the MSMEs to encash their receivables, has borne fruition.
The system seeks to facilitate financing of trade receivables of MSMEs from corporate and other
buyers, including government departments and public sector undertakings (PSUs) through
multiple financiers. Out of the three licensed entities, two have already commenced operations. It
would be important that the use of TReDS is made mandatory for, to begin with
corporate and PSUs and later for the Government departments. I would urge
ASSOCHAM and the MSME Ministry to proactively examine this aspect as success of
TReDS initiative can be a game changer for the sector.
(ii) New institutions/New processes
Besides the two new universal banks, RBI has issued banking licenses to all ten Small Finance
Banks that had received in-principle approval from RBI. Seven of them have commenced
operations while the remaining three should become operational in next couple of months. The
licensing condition of these banks entails focusing on lending to un-served and under-served
sections including small business units, small and marginal farmers, micro and small industries
and unorganized sector entities. The SFBs will be required to extend 75 per cent of their loans to
the sectors eligible for classification as priority sector by the Reserve Bank with at least 50 per
cent of the loan portfolio constituting advances up to Rs. 25 lakh. We believe that on account of
their prior experience as MFIs/NBFCs, these new banks would be able to serve the MSME sector
with aplomb.
Along with measures to improve accessibility, there is also a need to concentrate on new modes
of delivery. Reaching out to the MSMEs in the remote corners has always been a complex issue
in view of lack of brick and mortar branches across the country. One possible solution for this
problem is convergence of efforts between banks on one hand and the NBFCs, MFIs on the
other who are more familiar with local conditions, business viability, better information about the
credit worthiness of individuals, their repayment capabilities etc. Currently, within RBI, we are
deliberating on a
framework for co-origination of loans by banks and the NBFCs/MFIs with
risk participation which would leverage upon unique strength of both entities, while benefitting
the entrepreneurs in form of lower credit costs.
b) Improving ease of doing business climate
(i) An Udyami Mitra Portal has been set up by SIDBI, leveraging the IT architecture of their
StandUp Mitra portal, which aims at instilling ease of access to MSMEs' financial and non-financial
service needs. The Portal, as a virtual market place endeavours to provide 'End to End' solutions
not only for credit delivery but also for the host of credit-plus services by way of hand holding
support, application tracking and multiple interface with stakeholders (i.e. banks, service
providers, applicants). I understand that the portal is far from attaining the level of patronisation
than expected. Hence, I urge the banks as well industry associations to help create awareness
about this facility amongst the borrowers.
(ii) Movable assets registry
Movable assets, as opposed to fixed assets such as land or buildings, often account for most of
the capital stock of private firms and comprise an especially large share for micro, small and
medium-size enterprises. Hence, movable assets are the main type of securities that firms can
pledge to obtain bank financing. CERSAI, in active co-ordination with Government of India and
Reserve Bank has already established the movable asset registry, which when mature would
have a multiplier effect in lending to the sector. I would again request all stakeholders to make
optimal use of this platform.
(iii) Credit counsellors
Most MSMEs are typically enterprises with weak credit histories and also with inadequate
expertise in preparing financial statements. To overcome this handicap, RBI took initiatives to
implement a scheme wherein services of a set of certified credit counsellor would be available to
the MSME entrepreneurs. These counsellors will act as facilitators and enablers to micro and
small entrepreneurs, so that they can access the formal financial system channel with greater
ease and flexibility. SIDBI's help has been taken for the purpose and I am pleased to inform that
the operational guidelines in this regard have been finalised and the scheme is set to be rolled
out in the coming days.
(iv) Capacity building
As I mentioned earlier, capacity building with banks is extremely important as it endows them
with requisite skill-sets as well as sensitivity to the needs of customers. Realizing the gaps in this
area, RBI launched a National Mission for Capacity Building of Bankers for financing MSME
Sector (NAMCABS) in collaboration with College of Agricultural Banking, Pune in August 2015.
The mission involved structured training initiatives for in-charges of MSME Divisions in
commercial banks, training of the trainers at training establishments of commercial bank and
training of in-Charges of specialized branches for MSMEs. I am pleased to inform that until end
March 2017, about 5605 bankers have been trained under the programme. Presently, we are
undertaking an exercise to assess the impact of NAMCABS initiative on operational and
behavioral aspect of bankers.
c) Resolving stress in MSME sector
Bankruptcy law
As I mentioned earlier, based on a framework approved by the GoI, RBI has issued guidelines on
'Revival and Rehabilitation of MSMEs' in March 2016. Government of India has further approved
the Insolvency and Bankruptcy Code 2016 with an objective of expediting resolution of stressed
assets and streamlining the process of liquidating a business. The Code also provides for a fast
track insolvency resolution process which will be an enabler for start-ups and MSMEs to
complete the resolution process in 90 days (extendable to 45 days in deserving cases).
Conclusion
10. I would like to conclude with following messages for the MSMEs and the banks:
MSMEs must not fall into the lure of unrelated diversification or quick expansion. They should
rather look to conserve capital and strengthen their balance sheet.
The firms need to be open with their bankers about the problems that their enterprise is
facing at the earliest opportunity. On their part the banks would need to be pragmatic and
sympathetic to the problems that the firms is facing and be willing to provide all possible
help. Remember, bankers and borrowers have a symbiotic relationship and one cannot
prosper in isolation.
Most of the MSMEs are individual-driven enterprises with no succession planning. In order to
sustain an enterprise entity, it is essential even for small to mid-size firms to plan for future
by identifying a successor.
11. To sum up, the strategic importance of MSME sector as a prime mover of employment and
economic growth in the country can hardly be overemphasized. Technology and innovation will
continue to play a pivotal role in creating a business friendly atmosphere for the MSMEs. All
stakeholders- whether banks, MSME firms or the policy makers- must make efforts in their
respective domains to seize the opportunity that the MSME sector provides. For a healthy and
mutually beneficial relationship between the banks and borrowers, it would be essential for both
parties to understand and appreciate each other's point of view. The bottom line is that the
information asymmetry that exists between the two parties needs to be bridged and industry
associations like ASSOCHAM would have to strive to make that possible. I once thank
ASSOCHAM for inviting me here to share my thoughts and wish the summit all success!