New Intermediaries to Reach MSMEs

Context: While the Reserve Bank of India (RBI) has created another liquidity window for banks to finance Micro, Small and Medium Enterprises (MSMEs), banks are not considered as the best vehicle for the job.

Recent Liquidity Measures Taken

• Targeted long term repo operation(TLTRO) will make funds available for three years for banks to invest in bonds, commercial paper and debentures of MSMEs and also give them loans.

Issues with Banking System:  Following issues limits the capability of banks to act as effective liquidity enhancing tool for MSMEs

• Rising Non-Preforming Asset(NPA): renders the pursuit of risky financing to MSME non-feasible.
• Limited understanding of financial needs: Banks are not best suited to channelize funds; since formal banking provides 15% of the funds to MSMEs, rest come from shadow banking or informal sources.

Way Ahead: 

• RBI to support other financial institutions which are  active in the MSME sector such as:
• Non-Banking Financial Companies
• Special purpose vehicle under Small Industries Development Corporation (SIDC)
• Any financing arm given a mandate to acquire fintech tools for MSME.
• Develop the corporate bond market: from low-rated issuers, and also develop the bond segment of the commodity market.
• Ensure Hedging: RBI must work with regulators of insurance and the capital markets to create the entire range of derivative products needed to hedge the risks associated with the bond market.