Apex industry body ASSOCHAM today welcomed the reported decision of the Reserve Bank of India (RBI) on exploring a loan restructuring package for small and medium enterprises (SMEs) which is likely to provide much-needed immediate relief to the segment. “The Central Bank should expedite the process and complete it in a time-bound manner as it would help improve the liquidity condition of the SMEs which would go a long way in spurring job creation, giving a boost to exports and promoting India's economic growth,” said The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

MSMEs are the backbone of Indian economy, contributing nearly 32 per cent of the gross domestic product (GDP), 40 per cent of country's exports and 45 per cent to manufacturing output. MSMEs are also the largest employers, next only to agriculture. But of late, the sector has been facing the problem of credit availability. As per latest information, micro and small scale sector's credit growth has registered negative growth rate of 1.4 per cent as on September 2018 against positive growth rate of 1.7 per cent as on September, 2017.

Besides, share of credit to micro and small scale sector declined as a proportion of overall bank credit to 4.53 per cent in September, 2018 from 5.12 percent in September, 2017. In this context, the reported initiative of the RBI to explore a loan restructuring package for small and medium enterprises (SMEs) is a much awaited step at this juncture. Credit flow to MSME sector has shrunk and credit growth has been feeble. Banks are not best equipped to lend to MSME sector. Some of the factors constraining credit flow to this sector include compliance and managerial costs faced by the banks, most of the MSMEs lack enough collateral or well established sale trails to justify credit appraisal. And while credit is vital, this is just one of the constraints faced by MSMEs; other includes unsatisfactory and inadequate infrastructure and access to market.

Given the importance of MSMEs in terms of contribution to output, employment and exports, it is imperative to improve the credit flow to the MSMEs. Commercial banks need to move away from traditional credit appraisals to innovative ways to enhance and expedite credit flow to the MSME sector. Also, banks need to focus on GST return filed by MSME to assess income and output rather than sale realization which in case of MSME do not reflect correct picture due to long leads and delays. The credit flow from commercial banks also needs to be supplemented by NBFCs, as they are much closer to their clients.