The central bank is pushing P2P lending, regulatory sandbox, TreDS and co-lending model to increase credit flow to the MSME sector, says Anil Kumar Sharma, executive director, RBI.

The Trade Receivables Discounting System (TReDS) platform is a project of the Reserve Bank of India that aims to make it easier for MSME receivable payments from corporates.

“All NBFCs will be able to use the TreDS platform going ahead. Furthermore, we’ve stated that TReDS may access GST and other links that are available, so any financial firm that needs information should be able to get it, according to Anil Kumar Sharma, executive director of the RBI, during the panel discussion Springboard@75 at the SIDBI ET Summit.

He claimed that the TreDS platform, which is made available to MSME, corporate buyers, and financiers in the form of banks, was launched by RBI. The government announced in 2018 that companies with a turnover of over Rs 500 crore were required to be on the TreDS platform. The compliance was slow, but this issue is still being pursued.

Sharma said that in order to increase credit flow to the MSME sector, the RBI is promoting P2P lending, regulatory sandbox, TreDS, and co-lending models. Sharma added that the RBI continues to take action based on the feedback from these segments.

The Current Status

According to him, there are six billion MSMEs that employ 12 billion people and account for 45% of manufacturing output, 40% of exports, and more than 28% of GDP. However, there is a massive disparity between the credit that the industry needs and is receiving, with a shortfall of Rs 2.58 lakh crore.

He explained the causes of the credit gap and noted several that are unique to MSMEs, such as a lack of formalization, small size (more than 90% of MSMEs are small), and inadequate technology. The product is not very nice, the finish is not acceptable, and they lack the unique touch that the imported products have since they use subpar technology, according to Sharma.

Additionally, the infrastructure is poor, with few industrial clusters operating as intended. The testing and training facilities are insufficient, and MSMEs lack access to personnel capable of operating imported machinery. He thought that the formalization of the MSME sector would improve when the MSME definition was changed and the Udyami portal was established.

Improving Credit

He claimed that adopting technology is the most crucial action that MSMEs and banks should do to increase credit to the industry. Banks’ adoption of technology will be multi-layered because it will solve information asymmetry.

“For instance, recording cash flows and payment histories, which can be done by connecting to the GSTN and income tax networks and the credit network. If they can establish these connections, they will be able to record the MSMEs’ credit history and record and evaluate their creditworthiness, according to Sharma.

According to him, banks may utilize fintech through P2P networks, partnerships with account aggregators, and joint development of fintech technology.

Despite accusations of high fees and coercion throughout the recovery process, he claimed that P2P lending platforms must abide by the fair practice’s code that the RBI has established for NBFCs and banks. They can only engage in loan activities in collaboration with banks and NBFCs, and if the P2P platform violates any laws, the offending bank or NBFC will bear responsibility.

He said that account aggregators have been set up and will act as the guardians of all consumer data for all financial entities. The process of obtaining credit will be made easier, and institutions will be able to obtain information with the approval of the individual whose information it is.

Additionally, banks and NBFCs working with fintech’s can establish their own digital business divisions. According to him, the third cohort in the regulatory sandbox is MSME lending. All of these will increase process effectiveness and extend credit reach to hitherto unreachable segments.