Budget 2023: MSMEs tell FM Nirmala Sitharaman how to improve access to bank loans | The Financial Express

Budget 2023: MSMEs tell FM Nirmala Sitharaman how to improve access to bank loans

Credit and finance for MSMEs: According to FISME, banks demand BLR rating from SEBI-approved credit rating agencies (CRAs) for lending to SMEs, however, the rating system is meant for listed units. Hence, there is virtually no model of BLR rating for non-listed units.

Budget 2023: MSMEs tell FM Nirmala Sitharaman how to improve access to bank loans
While credit rating for listing of companies is to ascertain ‘ROI/ growth’ for retail equity holders/investors, the BLR rating needs to determine solvency of borrowers as working capital by banks is a demand loan for short term.

Credit and finance for MSMEs: Federation of Indian Micro and Small & Medium Enterprises (FISME), a representative organisation for the MSME sector, has suggested scrapping the bank loan rating (BLR) requirement by banks to lend to MSMEs and instead developing a unique rating model focusing on solvency alone of the borrower.

The suggestion was part of the talking points submitted by FISME for next year’s budget to the finance ministry. According to FISME, banks demand BLR rating from SEBI-approved credit rating agencies (CRAs) for lending to SMEs, however, the rating system is meant for listed units. Hence, there is virtually no model of BLR rating for non-listed units and as a result, CRAs hardly award even BBB+ rating to MSMEs which has become a must for the bankers, it said.

“The existing system of giving points under the BLR rating system, which is similar to the credit rating system, is for listed companies but it has also been applied for non-listed companies looking to raise funds. Hence, in the absence of a rating model for non-listed units, MSMEs don’t get good ratings which lead to the challenge in raising credit,” Prashant Patel, President, FISME told FE Aspire.

While credit rating for listing of companies is to ascertain ‘ROI/ growth’ for retail equity holders/investors, the BLR rating needs to determine solvency of borrowers as working capital by banks is a demand loan for short term. 

The federation sought the government’s immediate intervention to set up a joint committee of the Reserve Bank of India, banks and stakeholders (Department of Financial Services and MSME associations) to develop a sui generis (unique) rating model for MSMEs which focuses on solvency alone. 

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Another key ask by FISME was to incentivize the quality of goods in public procurement in order to make the supply of sub-standard goods/services commercially unviable and eventually lead to a virtual cycle of quality. “Differentiating quality and paying for it extra in public procurement, constituting a huge proportion of GDP, can truly change the game.” 

A CIBIL-like institution can be created to capture differentiation in quality to share scores with all buyers, suggested FISME. “In public procurement, there is no mechanism to check how many times the supplier’s material is rejected or how many times he/she got a notice for the same because of which there is only price competition while focus on quality is not enough,” added Patel.

FISME also reminded the government of implementing the option of replacement of bank guarantees with surety bonds in bank loan to MSMEs which was announced in this year’s budget. It also reiterated concerns about pre-payment penalties of around 4 per cent levied by some private banks on micro and small enterprises (MSEs) who want to shift to another bank.  

“This is in direct defiance of the RBI-facilitated banking code (banking code (Code of Banks Commitment to Micro and Small Enterprise) for MSE customers of which they (banks) are signatories. More than 100 cases have been reported to FISME by MSE borrowers.” The federation called for a task force to study the issue and its solution.

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First published on: 22-11-2022 at 18:42 IST