Swaminathan J, Deputy Governor, Reserve Bank of India
Small businesses in the country often do not have sufficient assets to offer as collateral for their working capital needs, said Swaminathan J, deputy governor of the Reserve Bank of India (RBI), pointing out how formal banking can exclude such businesses.
Swaminathan delivered a speech on micro, small and medium enterprises (MSMEs) on Monday and the same was uploaded on the RBI website on Thursday.
“Banks often rely on asset-based lending, which relies on collateral rather than cash flows. However, many SMEs lack adequate assets for collateral, particularly for working capital needs, which often leaves small businesses excluded from formal banking sector financing opportunities,” he said at the annual Foreign Exchange Brokers Association of India day.
MSMEs operate in the informal sector, which makes it difficult to assess their solvency due to information asymmetry, especially with regard to their financial performance.
Payments are often delayed, which lengthens MSMEs’ business cycles and reduces their ability to fulfil orders or secure new ones. “Despite the existence of legal provisions that provide for penalties for late payments from buyers, MSMEs often refrain from invoking these provisions. Their reluctance is due to a combination of weak bargaining power and fear of losing future business opportunities,” he said.
First published: August 22, 2024 | 12:21 pm IS
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