swaminathan j : msmes - bridging the credit gap through improving confidence in lending speech by mr swaminathan j, deputy governor of the reserve bank of india, at the ceo forum of the federation of telangana chambers of commerce and industry, hyderabad, 16 november 2024. * * * shri suresh kumar singhal, president ftcci, shri r ravi kumar, senior vice president ftcci shri k k maheshwari, vice president, ftcci, mr. meela jayadev, convenor, ftcci ceo forum, chief executive officers gathered here today, ladies and gentlemen. a very good evening to you all. i am delighted to speak to you today on a topic that has always been close to my heartthe critical role of msmes and the importance of building confidence in lending to this vital sector. over the years, i have had the opportunity to work closely with msme units, witnessing both their potential and their struggles. in the early days of my career, as a young officer posted in the bustling peenya industrial area, i saw firsthand the energy and resilience that defined msmes, as well as the unique challenges they faced. later, mid - career, my experience deepened while working in the mid corporates group of sbi, where i further understood how access to timely and adequate credit could transform these businesses. these experiences have made me keenly aware of the importance of bridging the credit gap for msmes - a task that demands not only innovative solutions but also a firm commitment to fostering confidence among lenders and borrowers alike. as you are all aware, the msme sector plays a vital role in our economy, driving entrepreneurship and creating substantial employment opportunities. these enterprises serve as essential support units for larger industries and contribute significantly to the secondary and tertiary sectors. with approximately 6. 3 crore units1, msmes contribute nearly a third of india's nominal gdp and account for over 40 per cent of the country's exports2. more importantly, they play a crucial role in employment, generating over 22 crore jobs3 and holding immense potential to harness india's demographic dividend. thus, the msme sector not only powers economic growth but also uplifts the poor, providing livelihoods and fostering inclusive development across the nation. despite the critical role of the msme sector in the indian economy, a common grouse that we hear from this segment is that they find it difficult to secure timely and

##erabilities to asset prices, which move very sharply in times of market turbulence. balance sheet adjustments played a critical role in the impairment of financial systems in developed economies, by sharply reducing their capacity to provide finance. in turn, this probably contributed to both the magnitude and persistence of the slowdown in growth. by contrast, while emes were hit by liquidity constraints, which i referred to earlier in the indian context, the stability of balance sheets as a result of a more “ traditional ” structure helped to preserve the systems ’ capacity to provide finance. liquidity infusions quickly transmitted through to businesses and helped prevent the escalation from liquidity to solvency problems. the second structural factor in the indian context, in my view, is the capital account management framework. before the crisis, capital controls were generally seen as a hindrance to smooth global integration and a source of inefficiency. the perspective has changed somewhat, with an emerging view that some kinds of capital controls may provide temporary relief from the instability being transmitted from global shocks through high volatility in capital flows. this is still an evolving global debate, but the indian experience perhaps makes some contributions to it. broadly speaking, the indian approach to capital controls is based on a preference ordering. there are virtually no limits on foreign direct investment, apart from some sector - specific restrictions, which are not directly motivated by macroeconomic considerations. this channel is seen as being growth and productivity enhancing. there are virtually no limits on foreign portfolio investment into equities. in this channel, both market risks and exchange rate risks are fully borne by the foreign investor. however, there are limits on debt flows. these are the least preferred, essentially because the domestic borrower is obliged to repay and bears the exchange rate risk. within this category, long - term debt is preferred to short - term debt. external debt obligations can put enormous strain on the capital account if they are redeemed in the face of a global shock. putting some kind of limits on them reduces the vulnerability of the economy to this strain. looking back over the crisis period, when outflows from equity investments were so large, it is easy to imagine that the pressure and the consequent impact on domestic markets would have been far more intense if debt obligations were also being redeemed at the same time. i would describe the restrictions on debt inflows with respect to quantum, tenure and pricing which are currently in place as “ strategic ” in nature.