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 4

the achievement of this objective, the sharing of information can be made on the product features and the shariah methodology adopted in ascertaining the permissibility of the products in the various jurisdictions. strengthening risk management capabilities while financial liberalization and innovation have expanded the range of opportunities, it has also led to heightened uncertainties, greater volatility and increased potential of financial vulnerabilities. these developments require financial institutions to move to a higher standard of risk awareness and management. regulatory emphasis has shifted towards a more risk sensitive regulatory capital framework and the assessment of risk management systems and processes in financial institutions. extensive investment has been made by the industry to adopt a comprehensive and robust internal risk management infrastructure. in islamic banking, the requirement to manage risks becomes more important due to the special nature of the financial intermediation process that is guided by the shariah. islamic financial institutions have a multi - facet role. on the asset side, islamic financial institutions enter into diverse modes of islamic financial contracts, each with its own peculiar risk characteristics. basel ii, has to a certain extent, incorporated the identification of credit, market and operational risks that can be assimilated by islamic financial institutions. however, islamic financial institutions need to be ahead in exploring other dimensions of risks in these islamic financial contracts. the risk management infrastructure in islamic financial institutions must therefore be in place to identify, unbundle, measure, monitor and control all the specific risks in islamic financial transactions and instruments to provide for their effective quantification and management. strong risk management capabilities become more pertinent in view of the different contractual arrangements entered into by the islamic financial institutions with the different classes of depositors. demand deposits, under the guaranteed custody contract and investment deposits, under the mudharabah contract, each has its own unique risk and return attributes. islamic financial institutions must ensure that demand depositors are protected from the risks of islamic banking business. in respect of the mudharabah depositors, any adverse shock to the financial performance of the asset portfolio in the balance sheet will be directly transmitted to the liability side, resulting in an adverse impact on the returns to the investment depositors. islamic financial institutions have a fiduciary accountability in ensuring that depositors ’ funds are prudently managed and that the risk - adjusted returns on investments are maximized. the ability to maximize risk - adjusted returns on investments and sustain stable and competitive returns to depositors will contribute to promoting confidence in the islamic financial industry.