In spite of the significant contribution of MSMEs to the Indian economy, there still remains a huge credit gap in the sector. The recent recommendations of the Reserve Bank of India (RBI) have caused banks to pull up their socks and gear up to bridge the financing gap, reports DNA India.
The RBI, lately, has announced certain credit guidelines to banks for MSMEs. RBI had set a target of 20 percent for year-on-year credit growth. The apex bank has also suggested that 60 percent of the MSME credit by banks be made available in three stages: 50 percent in 2011, 55 percent in 2012 and 60 percent by 2013. RBI has also advised banks to increase the number of micro enterprise accounts by 10 percent.
To facilitate lending to MSMEs, the government and Small Industries Development Bank of India (SIDBI) established the Credit Guarantee Fund Trust for MSMEs (CGTMSME) in the year 2000. The Trust provides credit guarantees for collateral-free and third-party-guarantee-free loans of up to INR1 crore to MSMEs by banks and financial institutions. The RBI has also ruled that banks will not to accept collateral security for loans up to INR10 lakh (the earlier limit was INR5 lakh.)
CGTMSME approved guarantees for 7.34 lakh loan proposals as of January 31, 2012, for an approximate credit amount of INR34,000 crore. The measures taken by the government also led to increased credit flow to the MSME sector by 34.13 percent in March 2011, to INR4.86 lakh crore. The production by MSMEs increased by 11 percent during the same period, leading to a reduction in the existing financing gap.
The working group on MSME Growth constituted for the 12th Five-Year Plan has laid down certain recommendations. That, along with the RBI’s Committee on Priority Sector Lending, will create an environment conducive to MSME financing.
In the current year, it is likely that a sub-target for lending to micro enterprises will be allocated to banks. It is also anticipated that the limit of investment to be classified as an MSME will be raised, thus enlarging the scope of MSMEs. Venture capital funding might also be promoted to improve the scope of innovation in the MSME sector.
It is heartening that a policy framework for bridging MSME credit gaps is finally emerging.