In a bid to increase the institutional credit flow to micro, small and medium enterprises (MSMEs), banks can explore cash flow-based financing, as its funding to the sector is “not as per expectation“,  a senior government official has said.

“Overall credit growth to the MSME sector is not as per expectation. Banks are still the cheapest source of credit for MSMEs, and alternatives such as NBFCs (Non-Banking Financial Companies) only add to the cost of the credit,” said S.N. Tripathi, Additional Secretary and Development Commissioner, Ministry of Micro, Small and Medium Enterprises, on September 20.

“Banks can evaluate cash flow-based lending to the sector, which emphasises more on the entrepreneurship skills, in contrast to asset-based lending. It has been observed that Indian banks prefer to give asset-based loan and not proposal-based funding to new businesses,” he said on the sidelines of an event organised by the Indian Chamber of Commerce.

According to a recent data of the Reserve Bank of India (RBI), there has been a 3.3 per cent decline on the outstanding credit flow to the micro and small enterprises, and 8.7 per cent to medium enterprises over the year-ago period.

Further, as per the RBI’s priority sector lending guidelines, banks are required to attain a target of 7.5 per cent of the total credit to micro enterprises (investment in plants and machinery up to Rs 25 lakh) by March 2017.

“The central government is all set to introduce a financial support scheme that facilitates ‘Zero Defect Zero Effect’ manufacturing in the MSME sector,” Tripathi said.

The government has allocated Rs 491 crore as financial support to the scheme, which will focus on increasing productivity, reducing wastage, expanding markets and developing new products and processes, he added.

Source: The Business Standard