More Stories

Informist, Thursday, Aug 22, 2024

MUMBAI – Financial institutions should deploy more innovative solutions and supportive steps like restructuring and grace periods to help micro, small and medium enterprises, Reserve Bank of India Deputy Governor Swaminathan J. said on Wednesday.

"While timely repayment of dues is crucial to maintain the health of the financial system, financial institutions should focus on deploying supportive measures such as restructuring options, grace periods, and tailored repayment plans that give MSMEs the breathing space they need to recover and get back on track while encountering difficult situations," Swaminathan said addressing the annual day function of the Foreign Exchange Dealers Association of India. A copy of the speech was uploaded on the RBI website today.

The deputy governor also urged banks to be more transparent and fair in pricing foreign exchange transactions for MSMEs.

"Current regulations mandate that forex needs, including cash and hedging products, must be met through authorised dealers, with scheduled commercial banks playing a dominant role. These banks, holding a privileged position, have a fiduciary duty to act fairly and transparently, particularly with smaller clients like MSMEs," Swaminathan said.

He asked banks to take proactive steps to increase awareness and facilitate higher customer participation on the FX-Retail platform. The RBI introduced the FX-Retail platform in 2019, to enhance transparency and fairness in retail foreign exchange transactions, but it has seen only limited success.

Swaminathan said that many MSMEs lack adequate assets for collateral, particularly for working capital needs, which often leaves smaller businesses excluded from funding opportunities from the formal banking sector.

"As many MSMEs mainly operate in the informal space, assessing their creditworthiness can be difficult due to information asymmetry, particularly with respect to the financial performance of their businesses," he said.

Since MSMEs face unique challenges like low capital base, lack of scale, cash flow constraints from delayed payments, fluctuating market conditions and external economic pressures, the financial sector should adopt a more sensitive and empathetic approach towards them, he said.

The Trade Receivables Discounting System (TReDS), introduced by the RBI in 2014, facilitates the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and public sector undertakings through multiple financiers electronically.

While there has been an uptick in transactions Trade Receivables Discounting System (TReDS) in the last couple of years, there is a long way to go in onboarding more corporate buyers and MSME sellers on the platform to reap its full potential, he said. The TReDS was introduced by the RBI in 2014 to facilitate the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and public sector undertakings through multiple financiers electronically.

The RBI is engaging with the government on this and bankers should leverage their corporate relationships to encourage larger corporates to get themselves onboarded on the TReDs platforms, Swaminathan said.

Swaminathan said apart from traditional products like pre- and post-shipment finance, factoring, and invoice discounting, the financial sector can significantly aid MSMEs in managing risks through export credit insurance and currency risk hedging solutions.

"These financial instruments not only protect against payment defaults and currency fluctuations but also provide MSMEs with the confidence to explore and expand into new international markets," he said.   End

Reported by Richard Fargose

Edited by Saji George Titus

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.