It is widely expected that the RBI would soon start reversing the tight monetary stance, probably in its next policy review scheduled on January 24. The industry is eagerly waiting for such a move.
The rate hike cycle has already taken a toll on the economy with high cost of credit intensifying the strains on the industry. And needless to say, it's the small business guy who has suffered the most. In this scenario, the possibility of monetary easing by the apex bank is really something that should get our hopes up. If credit cost is lowered, it would greatly benefit the micro, small and medium enterprise (MSME) sector.
But statistics don't seem to agree much. According to the Fourth Census of MSME sector (September 2009), only 5.18 percent of the units had availed of finance through institutional sources while 2.05 percent of them had finance from non-institutional sources and the majority of units (92.77 percent) had no finance or depended on self-finance. Considering this extent of financial exclusion in the sector, I think that the problem of unavailability of finance is overshadowing the issue of high cost of credit.
When it comes to lending to small firms, we all know that bankers and business entrepreneurs usually take exception to each other. There is too much distrust in the relationship, which shouldn't be there. I think, banks need to change from mere lenders to business partners. They should start providing advisory and planning services actively, and their staff should be specially trained to help MSMEs in diverse areas, including marketing, technology and market access. Such an approach will help not only the small firms seeking loans but also the bankers in appropriate risk assessment and risk management.
Equally important is to boost the country's financial system to suit the needs of the MSME sector. The government should urgently focus on establishing mechanisms to improve the credit information infrastructure, strengthen creditors' rights, speed up payment by corporate, avail more alternative sources of capital, and ensure timely identification and prevention of sickness in MSMEs.
We are all aware of the importance of the MSME sector, which plays a pivotal role in our overall industrial economy owing to its contribution to production, exports and employment. That is why the government should immediately move to get round the lingering credit crunch faced by the sector. We need a well-nurtured MSME sector that can guide our economy where we want it to be in the future.
The rate hike cycle has already taken a toll on the economy with high cost of credit intensifying the strains on the industry. And needless to say, it's the small business guy who has suffered the most. In this scenario, the possibility of monetary easing by the apex bank is really something that should get our hopes up. If credit cost is lowered, it would greatly benefit the micro, small and medium enterprise (MSME) sector.
But statistics don't seem to agree much. According to the Fourth Census of MSME sector (September 2009), only 5.18 percent of the units had availed of finance through institutional sources while 2.05 percent of them had finance from non-institutional sources and the majority of units (92.77 percent) had no finance or depended on self-finance. Considering this extent of financial exclusion in the sector, I think that the problem of unavailability of finance is overshadowing the issue of high cost of credit.
When it comes to lending to small firms, we all know that bankers and business entrepreneurs usually take exception to each other. There is too much distrust in the relationship, which shouldn't be there. I think, banks need to change from mere lenders to business partners. They should start providing advisory and planning services actively, and their staff should be specially trained to help MSMEs in diverse areas, including marketing, technology and market access. Such an approach will help not only the small firms seeking loans but also the bankers in appropriate risk assessment and risk management.
Equally important is to boost the country's financial system to suit the needs of the MSME sector. The government should urgently focus on establishing mechanisms to improve the credit information infrastructure, strengthen creditors' rights, speed up payment by corporate, avail more alternative sources of capital, and ensure timely identification and prevention of sickness in MSMEs.
We are all aware of the importance of the MSME sector, which plays a pivotal role in our overall industrial economy owing to its contribution to production, exports and employment. That is why the government should immediately move to get round the lingering credit crunch faced by the sector. We need a well-nurtured MSME sector that can guide our economy where we want it to be in the future.
Source...