India’s banks still shy away from lending to small businesses -- Business Insider’s MSME Exchange panelists debate the reasons
- Business Insider launched its
MSMEExchange’s 2021 edition on Monday, highlighting the issues faced by India’s MSMEs. Tamil Nadu’s finance minister Palanivel Thiaga Rajanhighlighted that the problem lies with the conversion from intent to output.
- Meanwhile, Edelweiss’ Madhavi Arora and
Indian Bank’s Kishor Kharat raised issues with risk aversion.
AdvertisementThe Indian micro, small and medium enterprises (MSMEs) continue to face capital crunch, despite the union government’s push towards their financial inclusivity. Several politicians, business leaders, bankers and investors joined the
Tamil Nadu’s finance minister Palanivel Thiaga Rajan, popularly known as PTR, has highlighted that there is no lack of intent in the Indian systems, but the problem lies with the conversion of intent into outcomes.
“When I went back to the meeting we had with the bankers last week, in the course of the meeting it became apparent to me that not everything that the
With this, he highlighted some of the structural challenges within the Indian system to support the MSMEs. He added that the bankers, after all, are humans and for them restructuring a ₹1,000 crore loan is much simpler than hundred ₹10 crore loans or thousand ₹1 crore loans.
Besides this, the kind of support given to large businesses, corporations and high profile businesses has shadowed the support to the Indian MSMEs. He also cited bureaucratic design, regulatory processes and technical integration as some of the major challenges in the system.
“You put all of this together, then I would say, some of it is structural in the way India works and the rest is unique to the times we live in,” PTR added.
Risk aversion leads to less credit availability to MSME
The credit availability for the MSME segment continues to be stressed, with nearly 50.7 million enterprises facing the lack of access to traditional lending challenges. This represents about 80% of the total 63.4 million MSMEs in India, a report by the Association of Chartered Certified Accountants added.
There was about 6.5% growth in bank credit last year between January to March 2020. However, the loan growth in the MSME segment or small businesses grew only by 1.1%. So even though data shows about 6.7% growth in MSME lending in 2021, it has really come off from a low baseline.
“Right optic is basically a multiplier to the economy. The kind of primary monitor that has been generating over the past two years or so, hasn't really percolated beyond the banking segment. This sort of reflects the fact that you know there is a major risk aversion in the economy, which I believe policymakers have tried to essentially address to some extent, especially given the fact that they've given you know a lot of loan guarantees to the final segment,” Madhavi Arora, lead economist at Edelweiss Securities, said during a panel discussion.
Kishor Kharat, former managing director of Indian Bank and principal partner at Amro Bucons, also agreed with this school of thought. He added that India is witnessing decelerating credit growth and therefore its credit-deposit ratio has also reduced by almost 9%-10%.
“Obviously, these are not good signs, but then this pandemic has really created certain issues... Yes obviously risk aversion is there, but then you look at the banking scenario today the financials of all banking industries all put together. They're going under tremendous stress, particularly, right from the asset quality review which was started during then [RBI] governor
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