Credit and finance for MSMEs: The Reserve Bank of India’s deputy governor M. Rajeshwar Rao has called for addressing the vast opportunity to fulfilling the existing credit gap in the MSME sector by banks and other financial institutions. Addressing the 31st Annual Management Convention of Thrissur Management Association recently, Rao underscored that the “critical issue in India’s credit market has been the consistent gap between the demand and supply of credit to MSMEs,” according to his speech published on the RBI website on Monday.
“This has to be seen as an area of opportunity by the banks and other financial institutions,” he said highlighting the challenges and opportunities in driving financial inclusion in the country.
Also read: MSME credit growth ‘distinctly higher’ than large industries post Covid: RBI report
Rao pointed towards the need for financial inclusion to be redefined by developing bespoke products and services that are best suited to different strata of society depending upon their income level. This shall include innovative solutions that make it easier for people to not only access basic but also to use a variety of financial services, he said.
Among factors for driving financial inclusion in India, RBI’s account aggregator framework to enable responsible use of data is expected to accelerate the development of alternative lending models such as cash flow-based lending and marketplace lending or what we popularly know as peer-to-peer lending. This, Rao said, would enable small businesses, including street vendors that may not have traditional collateral, to secure a loan.
Importantly, in the post-Covid period, credit growth to MSMEs in the industrial sector was “distinctly higher” not only on a year-on-year basis but also in comparison with credit growth to large industries, according to the central bank’s December 2022 Report on Trend and Progress of Banking in India.
Credit to MSME industries grew by nearly 20 per cent in FY21 and over 35 per cent in FY22 after a negative growth of around 2 per cent in FY20, down from around 3 per cent in FY19, indicating Covid impact. In contrast, credit growth to large industries stood at around minus 5 per cent in FY21 and turned positive to around 3 per cent in FY22.
According to investment banking firm Avendus Capital, the total credit gap in the MSME sector was $530 billion out of total addressable credit demand of $819 billion, of which only $289 billion MSME loan demand has been fulfilled through formal credit lenders such as private banks, public banks and NBFCs.