Integrated Finance for MSMEs with Right Technology to Be the Right Mix for Future Growth, Says Former RBI Deputy Viral Acharya
Viral Acharya, a CV Starr Professor of Economics in the Finance Department of the New York University Stern School of Business (NYU-Stern) and former Vice Governor of the Reserve Bank of India (RBI), delivered the keynote address of the webinar series in five parts on The Future of Banking. The session focused on integrated finance and MSMEs with the right technology that will change the way lending takes place in the future.
Acharya, academic advisor to the Federal Reserve Banks of New York and Philadelphia, also wrote about this in his book Quest for Restoring Financial Stability in India.
The session was moderated by FPJ, editor-in-chief, RN Bhaskar.
Edited excerpts:
Do banking in India today
Today, take a look at the banking landscape in India and the advancements India has made in the field of technology. The banking sector cannot remain untouched by the technological revolution in India, while other sectors are exploring it.
The future of banking in India will depend on how India adopts the technology in the future – still continuing its traditional function of providing credit to those who can use it for productive purposes in the economy.
The credit landscape is full of paradoxes. On the one hand, Indian banks have the highest nonperforming asset ratio (NPA) in the world, on the other hand, India does not have much credit penetration in terms of credit to GDP. . Normally, NPAs are high among countries that are generally overbanked. But for segments of India, especially micro, small and medium enterprises, this is not true.
Banks, which provide formal credit, meet only 16 percent of demand. Most MSME credits are in fact informal. So it’s outside the banking system. As a general rule, within MSMEs, bank credit is generally granted to enterprises with higher turnover.
Reports like RBI’s UK Sinha MSME 2019 report and 2018 IFC Financing MSME report, noted that the formal MSME credit situation in India looks more like the tip of the iceberg. There is a lot of demand that is not visible. It’s informal. These are usually small loans with a high interest rate. It does not tend to have a personalized nature that MSMEs generally need. MSMEs have experienced a hard landing in the economy for one reason or another over the past five years.
All over the world, including in developed countries like the United States (United States), MSMEs are the largest employers. Meanwhile, in India, MSMEs have not thrived to their potential. There are several reasons for this. But we wonder if the lack of access to formal credit is one of those reasons.
Financial scenario in India
India’s informal financing at the moment is organized in a very complex way. Here, no one knows who is connected to whom. There is a mix of potential financiers and borrowers. Attempts are made to reduce the distances between lender and borrower by appointing various types of agents, and in this process all kinds of complex links are put in place. However, at the end of the day, the level of credit extension that we create for formal financing is not that high.
Right in the center, there are banks. Just at the top edge there are MSMEs. MSMEs interact with different platforms for different aspects such as GSTN, GEM, online platforms and other intermediaries – these are the entities on the intermediary edge. They are connected to MSMEs outside. This will allow banks to get to MSMEs very quickly with the help of these intermediaries.
