Credit and Finance for MSMEs: Even as Finance Minister Nirmala Sitharaman announced a slew of measures to boost credit growth in the MSME sector, the move did not improve the situation.

The credit growth in the MSME sector has contracted by 3.85 per cent in the financial year so far. The contraction in the micro and small enterprises stood higher than that in the medium enterprises, says the RBI October bulletin report. The credit growth in the micro and small enterprises shrank 4.4 per cent from Rs 3.75 lakh crores in March 2019 to Rs 3.58 lakh crores in August 2019, while the credit growth in the medium enterprises shrank by 1.8 per cent. 

In the past few weeks, the Finance Minister announced a few measures to boost growth in the muted MSME sector.  After the government’s announcement regarding the repo rate-linked loans, the RBI mandated that all scheduled commercial banks should link floating rate loans to Micro and Small Enterprises (MSEs) to the policy repo rate or 3-month T-bill rate, or 6-month T-bill rate, or any other benchmark market interest rate published by the Financial Benchmarks India Private Ltd (FBIL), from 1 October 2019. 

The RBI said that the new move was introduced because the previous system of MCLR lacked transparency as the MCLR is internal to each bank, and borrowers have no way of ascertaining as to how it has been arrived at. While it may not matter for new borrowers as they are able to compare overall lending rates across banks and take a decision in their best interest, it impacts existing borrowers as they cannot easily ascertain the factors that lead to the changes in MCLR. 

Another reason cited by the RBI for such changes is the slow rate of transmission as banks were slow to adjust their deposit interest rates which, in turn, had a bearing on their lending rates.

Meanwhile, the credit growth in large enterprises, services and in the priority sector has also contracted so far in the current financial year.

Published On : 17-10-2019

Source : Financial Express