RBI deputy governor calls for addressing credit gap in MSME sector

The Reserve Bank of India’s deputy governor Mr. M. Rajeshwar Rao has called for addressing the vast opportunity to fulfilling the existing credit gap in the MSME sector by banks and other financial institutions.

Critical issue in India’s credit market

The consistent gap between the demand and supply of credit to MSMEs has been a critical issue in India’s credit market, according to Mr. Rao's speech published on the RBI website. He underscored that this gap needs to be seen as an opportunity by banks and other financial institutions.

Driving financial inclusion in India

Mr. Rao pointed towards the need for financial inclusion to be redefined by developing bespoke products and services that are best suited to different strata of society depending upon their income level. Innovative solutions that make it easier for people to access basic financial services and a variety of financial services are required to drive financial inclusion in the country.

Among factors for driving financial inclusion in India, RBI’s account aggregator framework to enable responsible use of data is expected to accelerate the development of alternative lending models such as cash flow-based lending and marketplace lending or peer-to-peer lending. This will enable small businesses, including street vendors, that may not have traditional collateral, to secure a loan.

Distinctly higher credit growth to MSMEs in industrial sector

Credit growth to MSMEs in the industrial sector was “distinctly higher” in the post-Covid period not only on a year-on-year basis but also in comparison with credit growth to large industries, according to the central bank’s December 2022 Report on Trend and Progress of Banking in India.

Credit to MSME industries grew by nearly 20% in FY21 and over 35% in FY22 after a negative growth of around 2% in FY20, down from around 3% in FY19, indicating Covid impact. In contrast, credit growth to large industries stood at around minus 5% in FY21 and turned positive to around 3% in FY22.

Total credit gap in the MSME sector

According to investment banking firm Avendus Capital, the total credit gap in the MSME sector was $530 billion out of total addressable credit demand of $819 billion, of which only $289 billion MSME loan demand has been fulfilled through formal credit lenders such as private banks, public banks and NBFCs.

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