reported slackening of productivity growth and closing of the output gap, inflationary concerns might still persist in advanced countries. many emerging markets continue to experience inflationary pressures and have tightened monetary policy. if oil prices turn volatile, inflation concerns may resurface. another area of concern is the impact of the us slowdown on the global economy. the current slowdown has been triggered by the adverse development in the subprime segment of the housing sector. looking at the recent stock market response, it does not seem unlikely that the trouble in the subprime sector could permeate into other segments of the housing sector. in such a scenario, consumption demand, which has been steady thus far, could get affected. the persistence of global imbalances continues to cause concern. slowing us growth, coupled with dollar depreciation, is expected to keep the deterioration of current account deficit under check. however, even under the most favourable scenario, the net foreign liabilities position of the us would continue to deteriorate further, raising the prospects of an eventual adjustment. the increasing integration of china and india into the global production stream has significantly altered the efficiency of the global production process. while exchange rate changes are a part of the process of adjustment, a larger part of adjustment would have to occur through changes in domestic policies of the key global players in such imbalances. this would involve a rebalancing of savinginvestment behavior between the us and economies with large surpluses. if the adjustments were to occur mainly through exchange rate adjustment, it would have wider ramification for global financial stability. the emerging market countries would be particularly vulnerable, as the major share of their external liabilities is in us dollars. while a disorderly unwinding of global imbalances remains a low probability event, concerted efforts by key stakeholders are required to avoid such an occurrence. while the us growth is expected to slow, stronger fiscal performance should improve the resilience of the economy. in the event of a sharper slowdown, it is important that the slack is taken up by the euro area and japan, so that global growth remains buoyant. growth projections indicate that euro area growth would revert to its potential level, which remains comparatively low. in order to sustain the current level of performance, the region needs to close the productivity gap with the us by increasing competition and removing labour market distortions. while growth momentum has clearly picked up in japan, fiscal reforms and supply - side

access alternate sources of capital like equity finance, angel funds / risk capital is extremely limited. at present, there is almost negligible flow of equity capital into this sector, which poses serious challenge to development of knowledge - based industries, particularly those that are promoted by first - generation entrepreneurs with the requisite expertise and knowledge. venture / risk capital is, therefore, often a more appropriate financing instrument for high - growth - potential and start - up smes. however, access to this type of financing is often not available to them. in the absence of alternate sources of finance, the smes ’ reliance on debt finance is very high. the availability of debt finance, however, is not adequate as viability of these small units is a major issue. besides, the high reliance on debt, combined with high cost of credit adversely impacts the financial viability of start - ups, particularly in the initial years, thereby threatening their long - term survival and sustainability. c. constraints of banks in lending to the sector 6. one of the major challenges faced by the msmes and more particularly, the micro and small enterprises ( mses ), is access to timely and adequate credit from the banking sector. the lenders are reluctant to service the mses for a number of reasons, the foremost of which emanates from a general perception amongst banks that the credit risk in lending to small and medium borrowers is very high. this, in itself, is a wrong notion that i have been trying to dispel through my presentations supported by hard data. while the headline numbers of non - performing assets ( gross and net npas ) are higher in this segment, if one reckons the extent of restructuring and write - offs that are resorted to in the medium and large borrower segments, the credit risk would appear to be much lower in the mse sector. a comparative table indicating the extent of npas, restructuring and cumulative write - offs in micro and small vis - a - vis medium and large segments during the last five years is given below : the data clearly highlights the fact that in the recent scenario of rising impairment of assets in the banking sector, it is the mses that have demonstrated better credit discipline resulting in lower impairment. 7. the other reasons why mses are regarded as high - risk is on account of insufficient assets and low capitalization, vulnerability to market fluctuations and high mortality rates. information opacity arising from mses ’ lack of accounting records, inadequate financial