Mumbai (Maharashtra) [India], November 18 : The banking community should view MSMEs not merely as a sector of risk but as a sector brimming with opportunity, Finance Minister Nirmala Sitharaman said on Monday and noted that cash flow-based lending has the transformative potential to address the working capital requirements of MSME units.
Sitharaman, who delivered the keynote address and participates in a Question & Answer Session at the 11th SBI Banking & Economics Conclave 2024, said India's sound banking system, with cleaner balance sheets & adequate capital buffers and robust earnings, is well positioned to cater to the financing of long-term projects.
The minister said that India's economy, in its traditional or modern ways, depend a lot on MSMEs and "we need to be sensitive towards their needs".
The Finance Minister, who spoke on the theme 'Making Aspiration of Viksit Bharat a Reality', said Digital financial literacy must also be a priority to build public confidence in digital transactions.
"Digital financial literacy must also be a priority to build public confidence in digital transactions. In managing the banks, we should be extremely careful that governance is given a priority. By addressing both the 'access' and 'quality' aspects of financial inclusion, we can ensure that all segments of society are part of India's journey toward 'Viksit Bharat'," she said.
"Over the decade, through Jan Dhan Yojana and DBT, 54 crore Indians, including men and women, at the last mile and outside the formal banking net, have all come to enjoy the fruits of financialization," she added.
Sitharaman said the next wave of financial inclusion should see the transformation of these savers into investors of acumen, creating a largely self-reliant domestic financial system that bodes well for a resurgent Global South and India as well. "That would be the ultimate success for banking, in a uniquely Indian way," Sitharaman said.
"From 2014, our government made an effort in bringing financial inclusion and as a result we were able to reach certain level of financial inclusion with which you see the traction in the economy. The low levels of financial inclusion and formal identification was identified as a problem in 2008. But between 2011 and 2021, the number of adults with an account in a formal financial institution doubled from 35% to 77%," she added.
The minister said this achievement has narrowed the gaps in financial access between rural and urban areas, men and women, and rich and poor.
"However, financial inclusion is not just about opening bank accounts. It is about ensuring access to credit, insurance, and investment opportunities for all. We need to ensure 'Digital Financial Inclusion (DFI)' so that cost-effective digital means to reach everybody," she added.
The minister said that recent results of Public Sector Banks show resilience among them.
"India's sound banking system, with cleaner balance sheets & adequate capital buffers and robust earnings, is well positioned to cater to the financing of long-term projects. The recent results of the Public Sector Banks show resilience among them: - The Operating profit for H1FY25 was Rs. 1.5 lakh crore, which showed 14.4 per cent YoY growth and and Net Profit was Rs. 85,520 crore, which showed 25.6 per cent YoY growth. - The Gross and Net NPA of the PSBs stood at 3.12 per cent and 0.63 per cent, respectively, as of September 2024. - The Capital to risk-weighted assets ratio (CRAR) stood at 15.43 per cent in September-24 against regulatory requirements of 11.5 per cent," she said.
Noting that supporting the MSMEs through innovation in Credit Assessment is a very important step, the minister said that small ticket loans enable entrepreneurship and employment generation and therefore they must get due attention.
"Traditionally, the banking sector has relied heavily on collateral-based lending models. This approach, while effective in certain cases, does not always align with the unique needs and financial structures of MSMEs. That's why in this year's July Budget, we came up with announcements for MSMEs. If banks were hesitant to give them term loans as they needed substantial collateral, the government in the budget has announced collateral free loans to be given for MSMEs," she said.
"This involves adopting or developing new models of credit evaluation. That's why the announcement included transition towards alternative credit risk assessment models, such as cash flow-based lending. Cash flow-based lending has the transformative potential to address the working capital requirements of MSME units. The banking community should view MSMEs not merely as a sector of risk but as a sector brimming with opportunity," the minister said.
Sitharaman said a few days back, she had set the target of an additional MSME lending of Rs 1.54 lakh crore in this financial year for the SCBs & NBFCs, beyond the estimated Rs 4.21 lakh crore to be lent this with a 'business as usual' approach.
"Similarly, banks should target lending Rs 6.12 lakh crore in FY 2025-26 and Rs 7 lakh crore in FY 2026-27," the minister said.
The Finance Minister said that our foreign exchange reserves comfortably cover 11.8 months of imports and exceed 100 per cent of external debt, underlining the strong net buffer in the economy.
"let me assure you all that the Government is closely monitoring the evolving situation. We remain committed to taking all necessary measures to ensure that India remains firmly on course to become the third-largest economy in the world," she added.