s s mundra : empowering msmes – issues & challenges inaugural address by mr s s mundra, deputy governor of the reserve bank of india, at the 2nd bankers borrowers business meet 2016, new delhi, 6 april 2016. * * * assistance provided by shri jose kattoor and ms. chaithanya devi is gratefully acknowledged. 1. shri rajkumar dhoot, member of parliament ; shri k. k. jalan, secretary, ministry of msme, govt. of india ; shri ashwani kumar chairman, indian banks ’ association & cmd, dena bank ; dr. kshatrapati shivaji, chairman & managing director, sidbi ; shri sunil kanoria, president, assocham ; dignitaries on the dais ; distinguished colleagues from the banking fraternity ; members of assocham ; representatives of the print and electronic media ; ladies and gentlemen! bringing the bankers and the borrowers together on a common platform to deliberate on issues and challenges that afflict businesses is a very novel idea and hence, i could not refuse an invite to address this gathering for the second year in a row. so, i begin by complimenting assocham for conceptualizing this “ bankers - borrowersbusiness ” meet and more so, for choosing “ empowering msmes ” as the theme for the second edition of the meet. the theme is extremely significant for a number of reasons : continued moderation in economic growth ; rising pile of stressed assets in the corporate loan book of banks ; need for employment generation ; fulfilling entrepreneurial ambitions and so on. 2. i understand that three fundamental issues pertaining to the msme sector are getting covered during the deliberations here : firstly, enabling better understanding of the sector by the banking community ; secondly, ensuring timely financial support to distressed micro and small enterprises ; thirdly empowering msmes, an objective that is closely linked to the first two. 3. let me set the ball rolling by briefly speaking on each of these three issues which can then be deliberated upon in greater detail in the technical sessions that follow. to put things in context, i would like to recall that the msme sector has emerged as a vibrant and dynamic sector of the indian economy, contributing 37. 5 per cent of india ’ s gdp, with its vast network of 48 million enterprises providing employment to 111. 4 million persons. 1 it may not be out of place to mention here that in the face of adverse economic conditions prevalent in the

by a sense of moral outrage directed at others : co - decisionmakers, lenders, the wider political and economic system. though, deep down, they know their legal obligations will likely catch up with them sooner or later, they choose to wait - andsee. • management of multiple debts. accumulating arrears on credit - card and utility debts, for example, can impose immediate costs in higher interest or in having the utilities cut - off. non - mortgage debt will often be prioritised as a temporary coping strategy. repossession of one ’ s home can seem a remote risk in the face of more immediately pressing financial issues resulting again in wait - and - see behaviour on mortgage debt in order to pay bills or service other debts. • consumption - smoothing. micro - economics text - books generally explain household borrowing and saving behaviour as a strategy for life - time consumption - smoothing. no reader of such texts should be surprised to see households seeking to manage an income - shock by borrowing from the cheapest source. it can appear to households that, for a time, accumulation of mortgage arrears is the cheapest form of borrowing, in the hope that the income shock might prove transitory. given the passivity of irish banks, such households can be tempted to postpone adjustments to their consumption pattern ; to wait - and - see. but, for good reasons, mortgage contracts do not contain “ wait - and see ” clauses. “ wait - andsee ” erodes the remaining life - time resources of the household available to service long - term debt, it heightens aggregate economic uncertainty, and can have spillover effects on the behaviour of others, ultimately undermining the functioning of the economic and financial system. the scale to which the unresolved arrears situation has grown in ireland reflects the absence of immediate consequences for non - payment. this lack of consequences has created a degree of moral hazard. taken into account, there is no evidence of a marked change in arrears behaviour when a borrower moves into a negative equity position. even in the us, and in the states where it is impossible for the lender to pursue a defaulting mortgage holder for the deficiency after sale of the collateral, the vast majority of borrowers ( over 80 per cent ) tell surveys that they regard not paying debts when one can afford to do so as morally wrong. nevertheless ( according to research carried out at the us federal reserve ) the existence of negative equity greatly