RBI working on co-lending model for MSMEs

The Reserve Bank of India (RBI) is working towards a formal co-origination model to give a boost to the flow of credit to the micro, small and medium enterprises (MSME) sector, deputy governor S S Mundra said.

Under the co-origination model, the bank financing a micro-finance institution (MFI) or non-banking finance company (NBFC) and the concerned MFI/NBFC join at each underwriting and sharing the loan amount at an agreed percentage with all other structures put in place.

''The advantage is that it can bring the strengths of the two sectors together - MFIs have better understanding of the ground level and last mile reach and banks can supplement the resources,'' Mundra said.

''In my mind, rather than simply going in for refinancing or on-lending, this co-origination can become an important way of catering to the MSME sector,'' he added.

The MSME sector contributes to more than 30 per cent of the country's overall GDP and accounts for nearly 45 per cent of the industrial output.

However, the rate of growth of outstanding credit to MSMEs extended by all scheduled commercial banks over the last four years declined from 28.51 per cent in 2012-13 to 19.66 per cent in 2013-14 to 12.62 per cent in 2014-15 and further to 3.83 per cent in 2015-16.

Further, the outstanding credit to the MSME sector as a share of adjusted net bank credit has remained at 17-18 per cent levels during the last four years - 2012 to 2016. According to RBI data, outstanding credit to MSMEs extended by all scheduled commercial banks rose to Rs12,16,000 crore as of end-March 2016 from Rs11,71,000 crore on 31 March 2015.

Mundra said it is very important for lenders to understand the life-cycle of MSMEs. ''Putting MSMEs in one bracket is a misnomer as micro-enterprises and SMEs are like comparing chalk and cheese,'' he said.

He underscored the need for products that meet the life-cycle needs of MSMEs and for a strong oversight mechanism in banks to see that MSME-related policies are implemented at the operating level. In respect of supporting faltering MSMEs, he said: ''Let us recognise that when we are talking about MSMEs, we are talking about entrepreneurship.

''Let us recognise that failure is an integral part of entrepreneurship anywhere in the world. Unfortunately, failure in our system is still a stigma.''

For borrowers, Mundra said that they need to understand the changing economic dynamics and impact on businesses. For micro-enterprises, lenders have to be imaginative and think about other ways of assessing their creditworthiness, he said.

''If banks continue to feel that the traditional rating model they do for micro units would be their guiding principle, then it is never going to work,'' Mundra said.

On their part, SME borrowers have been raising the issue that bankers are, in general, not sensitive to their needs. They feel that the non-performing asset (NPA) guideline of 90 days is too stringent and does not take cognisance of the life-cycle of SMEs.

The role of micro, small and medium enterprises (MSMEs) in the economic and social development of the country can hardly be over-emphasized. About one-third of the country's GDP is contributed by more than 50 million MSMEs in the country.

At the same time, he pointed out that by 2020, India will also have the largest job-ready youth population in the world.

But, with big manufacturing companies increasingly automating their operations and process flow, the number of jobs in these industries is going to decline and the new jobs shold then come from the MSME sector, he said, adding that it is specifically because this that MSME sector needs handholding.

He was speaking at the third Bankers Borrowers Business Summit organised by Assocham in New Delhi on Friday.

A recent research by the World Bank has projected nearly automation could wipe out 69 per cent of jobs in India. However, since MSMEs are capable of generating plenty of jobs in segments like hospitality, apparel manufacturing, food processing and so on, it is time for the policy makers as well lenders to focus on them.

He said the motivation for the bankers to lend to the MSME segment would probably come from relatively poor return on their advances to the large corporate and also the recent regulatory guidelines restricting banks' exposures to single borrowers or borrowers in the same corporate group.

''With favourable ecosystem in the manufacturing/services sector, MSMEs can pave the way for fulfilling entrepreneurial ambitions and in the process be able to generate significant levels of employment. Yet providing adequate and timely finance at reasonable rate of interest to these 50 million units at the bottom of the pyramid has remained an elusive goal,'' he said.

It must be appreciated that to realize the country's aspirations for a double-digital growth, it is crucial that the potential of MSME sector is optimally tapped.