New intermediaries to reach msmes

New intermediaries to reach msmes

The Reserve Bank of India (RBI) has created yet another liquidity window for banks to finance small and medium enterprises, particularly in five sectors. This targeted long-term repo operation (TLTRO) will make funds available for three years for banks to invest in bonds, commercial paper and debentures of MSMEs and also give them loans. It would have been more helpful if RBI had decided to make such funds available to some non-banking financial companies (NBFCs) active in the space or to a special purpose vehicle under Small Industries Development Corporation or any financing arm given a new mandate to acquire fintech tools to assess the mettle of companies and develop a market for corporate bonds from low-rated issuers, rather than to the banks.

Banks are bracing for a big jump in their non-performing assets load when the moratorium ends, and would be loath to take on yet more risky financing. Banks are not the intermediaries best placed to channel funds to the struggling MSMEs right now. Most of them have limited experience in understanding the finances or requirements of MSMEs. Formal banking provides just about 15% of MSME funds, the rest is sourced from assorted shadow banks and shadier sources that are less than keen to disclose their identity and work through agents. RBI should refrain, ideally, from making the funds available under this window for making loans. It is imperative to develop a market for bonds that are less than triple-A-rated. Simultaneously, RBI must work with regulators of insurance and the capital markets to create the entire range of derivative products needed to hedge the risks associated with the bond market.

With the government having recently passed enabling legislation to permit netting of exposure to minimise margin requirements and reduce transaction costs in general, and giving agriculture greater market orientation, potentially giving a boost to commodity markets, it is imperative to develop the bond segment of the capital market. Banks are not the best vehicles for the job right now.