 "Asset shortages hinder MSMEs access to formal bank financing: RBI DG | Finance News")
Swaminathan J, deputy governor of the Reserve Bank of India
Micro, Small, and Medium Enterprises (MSMEs) often lack sufficient assets to offer as collateral, especially for working capital needs, which frequently excludes smaller businesses from accessing funding from the formal banking sector, said Swaminathan J, deputy governor of the Reserve Bank of India, on Monday. The speech was uploaded on the RBI website on Thursday.
The deputy governor noted that since banks typically rely on asset-based lending, which requires collateral rather than cash flow, these businesses face significant challenges in securing financial support.
While speaking at the annual day of the Foreign Exchange Dealers Association of India (FEDAI), he said, “Banks often use asset-based lending, which relies on collateral rather than cash flow. However, many MSMEs lack adequate assets for collateralisation, particularly for working capital needs, often leaving smaller businesses excluded from funding opportunities from the formal banking sector.”
He further mentioned that many MSMEs primarily operate in the informal sector, making it challenging to assess their creditworthiness due to information asymmetry, especially regarding their financial performance.
The deputy governor highlighted that MSMEs frequently face the persistent problem of delayed payments, which extends their operating cycles and reduces their ability to fulfil existing orders or secure new ones. Although statutory provisions impose penalties for delayed payments by buyers, MSMEs often hesitate to enforce these measures. This reluctance arises from their weak bargaining power and the fear of jeopardising future business opportunities.
“MSMEs commonly encounter the persistent issue of delayed payments. The delay in receiving payments prolongs their operating cycles and diminishes their capacity to fulfil existing orders or secure new ones. Despite the existence of statutory provisions which entail penalties for delayed payments by buyers, MSMEs often refrain from invoking these provisions. Their reluctance stems from a combination of weak bargaining power and the fear of losing future business opportunities,” he said.
First Published: Aug 22 2024 | 12:21 PM IST
