India: RBI mulls new model to boost credit flow to MSMEs

Jun 2017
India, June, 17 2017 - The Reserve Bank of India (RBI) is working on a formal co-origination model to boost flow of credit to the micro, small and medium enterprise (MSME) sector, reports media on Friday.

Addressing an event in New Delhi, Deputy Governor of RBI, S S Mundra said, "RBI has been trying to develop a formal co-origination model whereby bank is not financing MFIs (micro finance institutions) and NBFCs (non-banking finance companies) for on-lending to ultimate borrowers, rather both of them provide loan at the borrower levels and share the loan amount at agreed percentage."

"This can bring strength of two sectors together. The MFIs have a better understanding of the ground level, they have the last-mile reach whereas the banks can supplement the resources. Rather than simply going with financing or on-lending, this co-origination can become an important way to cater to MSME sector," Mundra added.

"There had been already consultation and discussion with the banking industry because it is something where essentially banking and non-banking lender have to come together. So those consultations were already on, and it is a paper in making, not that a final view has been taken," he said.

Mundra was addressing the 3rd national summit -- Bankers Borrowers Business Meet 2017 -- organised by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) in New Delhi on Friday.

"It is something (guidelines) which is in making. The idea is it can be an alliance of people in lending sector," he said.

He suggested the banks that for them to continue with meaningful lending, the one segment which will be very-very important will be MSMEs.

"For bankers, apart from the market dynamics, the restrictions on their ability to finance large corporates, even the growing competition in the market would make it essential to finance MSMEs and also they should move quickly, relook at their processes and try to become proactive," said Mundra.

He said that it is very important for the lenders be it bankers or the NBFC lenders to understand and appreciate the lifecycle needs of the MSMEs.

"I think putting MSME in one bracket is a big misnomer, they are as different as chalk and cheese. Probably every lender has to think about micro in one particular fashion or may be small and medium there can be another common way of looking at it."

Considering that MSME units periodically get in to the cycle of difficulties owing to factors like sudden unexpected demand, he said that it is very important for the banks that products are designed to meet the lifecycle of MSMEs.

On Trade Receivables Discounting System (TReDS), Mundra said three entities were given permission for setting up platform for trade discounting.

TReDS, an automated system driven platform is expected to benefit MSMEs by facilitating them to auction their trade receivables at competitive market rates through transparent bidding process on the platform by multiple financiers.

The TReDS will be the first attempt in the country to introduce factoring without recourse and help not only quick realisation of receivables but also appropriate price discovery.

One has already started operation and other two would also start operation very shortly, said Mundra.

Source : SME Times

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