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RBI Dy.Governor Asks Banks To Enhance MSME Lending

Raj Narayan's picture
Tags: RBI
RBI Dy.Governor Asks Banks To Enhance MSME Lending
Banks should shed the myth that MSME sector is a high risk one when it comes to lending, says the RBI Deputy Governor KC Chakrabarty

Mumbai, December 05: Reserve Bank of India (RBI) Deputy Governor K.C. Chakrabarty has asked banks to urgently start lending to micro, small and medium enterprises (MSMEs) in order to bridge the ever growing requirement for credit from a sector that contributes significantly to India's economy.

The Bank estimated that over the last 12 months the gap between demand and supply of credit to the MSMEs stood at a whopping Rs.68,724 crore. And, the only source of funds for the sector happened to be banks, Chakrabarty said.

He added that scheduled commerncial banks should look beyond their existing customer base comprising large enterprises and retail customers to reach the MSMEs, who are getting deprived of credit because they are somehow placed in the high-risk category. 

Timely and adequate credit from banks gets curtailed because lenders are often reluctant to service MSMEs for several reasons, the main among them being that small and medium borrowers are a high risk category, the RBI Deputy Governor said at a workshop on credit scoring. 

While the headline numbers of non-performing assets (gross and net NPAs) are higher in this (MSE) segment, if one reckons the extent of restructuring and write-offs that are resorted to in the medium and large borrower segments, the credit risk would appear to be much lower in the MSE sector, he said.

Chakrabarty said a major constraint in banks’ lending stems from the fact that the existing system of credit appraisal and related processes are not geared to appraise the financial requirements of the MSE sector.

For evaluating loan proposals and to facilitate SME financing, banks will need to employ low-cost and quick decision-making alternatives. The use of credit scoring models can go a long way in facilitating lending decisions by reducing costs and increasing service levels, which can deliver great benefits for both lenders and MSE borrowers.