According to Swaminathan J, Deputy Governor of the Reserve Bank of India, on Monday, micro, small, and medium-sized enterprises (MSMEs) frequently do not have enough assets to offer as collateral, particularly for working capital needs. As a result, these businesses are often unable to obtain financing from the formal banking sector. On Thursday, the speech was posted to the RBI website.
The deputy governor pointed out that these companies have a difficult time getting funding since banks usually concentrate on asset-based lending, which takes collateral rather than cash flow.
Speaking at the Foreign Exchange Dealers Association of India's (FEDAI) annual day, he stated, "Asset-based lending, which depends on collateral rather than cash flow, is a common practice used by banks. Nevertheless, a lot of MSMEs don't have enough assets to use as collateral, especially when it comes to working capital requirements, which frequently prevents smaller companies from being eligible for loans from traditional banks."
He went on to say that a lot of MSMEs run their businesses mostly in the unorganized sector, which makes it difficult to evaluate their creditworthiness because of information asymmetry, particularly when it comes to their financial performance.
The deputy governor emphasized that MSMEs commonly deal with the ongoing issue of late payments, which lengthens their operational cycles and makes it harder for them to complete current orders or get new ones. Even though there are legal consequences for purchasers who delay payments, MSMEs are sometimes hesitant to enforce these laws. Their concern of losing out on future business prospects and their lack of negotiating power are the reasons for their hesitation.
"The recurring problem of late payments is one that MSMEs face frequently. Payment delays lengthen their operation cycles and reduce their ability to fulfill current orders and acquire new ones. Even though there are legal measures that impose fines on customers who fail to make payments on time, MSMEs seldom use these laws. They are reluctant because they fear missing out on future business prospects and have limited negotiating strength," he added.
