Improved lending to MSMEs needed: central banker

MSMEs make up almost a third of India’s nominal GDP.

A senior official of India’s central bank has told banks to improve financing to micro, small, and medium enterprises (MSMEs), calling small businesses the “backbone” of a resilient and dynamic economy.

“With improved access to finance, MSMEs will be better positioned to drive innovation, create jobs, and uplift communities across the country,” Shri Swaminathan J, deputy governor, Reserve Bank of India (RBI), told attendees of the CEO Forum of the Federation of Telangana Chambers of Commerce and Industry held in Hyderabad, India on 25 November 2024.

“Therefore, I would urge bankers to work collaboratively with MSMEs to build trust, enhance credit discipline, and ensure that they are equipped with the financial tools needed to succeed,” he added.

MSMEs contribute nearly a third of India’s nominal GDP, and account for over 40% of the country’s exports, according to 2024 data from the Ministry of Micro,Small & Medium Enterprises.

They also make up about 22 crore or 220 million jobs in India.

Swaminathan also noted the role of fintech solutions, particularly those that use alternative credit scoring based on sales patterns or supplier feedback, as means to help MSMEs secure funding more effectively.

Separately, Swaminathan encouraged MSMEs to take steps to improve their access to finance, chief of which is to embrace formalisation.

Many MSMEs operate informally, making it challenging for lenders to assess their creditworthiness due to information asymmetry, he noted.

“By registering on the Udyam Portal and filing GST returns, MSMEs can enhance the transparency over their level of business activity and financials. This will enhance their credibility and may qualify them for priority sector lending and government schemes, by reinforcing their trustworthiness in the eyes of financial institutions,” Swaminathan said.

MSMEs are also called to strive for greater credit discipline by improving their knowledge on different credit products such as term loans, working capital loans, overdrafts, and invoice discounting, amongst others.

Capacity building is also suggested, with Swaminathan saying that small businesses should engage with financial literacy programs and skill development workshops.

“Engaging with industry bodies and trade associations provides MSMEs with mentorship, funding opportunities, and market linkages. Collaborating with incubators and accelerators can offer access to training, networking, and funding,” he said.