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BOB MSME SCALE 3 --- RELATIONSHIP MANAGER

 Micro, Small and Medium Enterprises (MSMEs) have always played a vital role in the Indian economy. Not only do the 6.3 crore MSMEs in India contribute one-third to the GDP of the country but also provide employment to large sections of society.

Moreover, the sector is a critical source of livelihood and provides nearly 110 million jobs. Therefore, with the current emphasis on Atmanirbhar Bharat Abhiyan, these MSMEs have become even more significant to India’s economic and financial strategy.

Acknowledging the importance of the sector, the government of India (in 2019) envisioned that the sector would account for half of India’s GDP and add 50 million fresh jobs over the next five years.

However, there were significant signs of a slowdown due to Covid-19 (on the demand side) and structural reforms (on the supply side) like GST (goods and services tax) rollout and demonetisation also had adverse effects on the MSME sector.

Issues Faced by MSME

The fact that MSMEs contribute 55% and 60% to the GDP of Germany and China respectively is a clear indication that India still has a long way to go in its MSME journey. Following are the are that ails the MSME sector:

• The Credit Conundrum: A concerning gap in India’s MSME sector has been the credit supply shortage to MSMEs.
  • The formal credit available to this sector is ₹16 trillion. The viable credit gap is ₹20 trillion against a total demand of ₹36 trillion.
  • Further MSMEs in India typically rely on NBFCs and MFIs for their financing needs, given the lack of access to the banking sector.
  • With the NBFC sector enduring a liquidity crunch since September 2018, MSMEs were hard-pressed for money.
• Lack of Formalisation Amongst MSMEs: The main reason for this credit gap is the lack of formalisation amongst MSMEs.
  • Almost 86% of the manufacturing MSMEs operating in the country are unregistered.
  • Even today, out of the 6.3 crore MSMEs only about 1.1 crores are registered with Goods and Services Tax regime.
  • The number of income tax filers are even less. As a result, Indian MSMEs’ credit requirement has been largely unmet due to limited availability and access to data and legacy underwriting methods.
• Technological Disruption: India‘s MSME sector is based on obsolete technology, which hampers its production efficiency.
  • With the emergence of new technologies like Artificial Intelligence, Data Analytics, Robotics and related technologies (collectively called as Industry Revolution 4.0) is a bigger challenge for MSMEs than for organized large-scale manufacturing.
• Regulatory Cholesterol: MSMEs require a lot of government services and approvals, for which the entrepreneur has to run around various government departments.
  • Getting construction permits, enforcing contracts, paying taxes, starting a business and trading across borders continue to constrain doing business.
  • Regulatory risks and policy uncertainty in the past have dented investor confidence.
• Problem of Scale: Majority of the firms in MSMEs are micro-enterprises.
  • The MSME space is virtually a micro space formed by a plethora of small and local shops and hence, scaling them up is a problem, especially when fund access is challenging.

Due to these issues, the productivity of small firms in Indian manufacturing is abysmally low relative to larger firms. This has created a conspicuous ‘missing middle’ in the size structure of firms, which deters employment generation and dynamism in Indian manufacturing.

Way Forward

• Developing Bond Market: With India’s bond markets starting to take shape, promotion of SME bond issuances can provide a fillip to debt capital markets participation of MSMEs.
  • While such issuances will provide lower interest rates for MSMEs than other financial intermediaries charge, they will also be a viable high-yield instrument for informed and educated investors operating in the bond market.
• Creation of Independent Regulator: Given the growing importance of the data economy, it is paramount that the government creates an independent body which can advise and provide consultancy to MSMEs and enable them to win in this new, digital world.
• Reforming Labour Laws: Labour laws are not very conducive to MSME growth. They must strike the right balance between providing a growth-oriented framework for MSMEs to run in and providing sufficient protection for the rights of workers.
• Improving Regulation: While Ease of Doing Business has been a focus area, the reporting, approval and compliance requirements for small businesses continue to border on the higher side.
  • If we truly want to create a country where MSMEs can influence our economic destiny, it is imperative that they are provided with a hassle-free regulatory framework which works for them rather than against them.

Conclusion

MSMEs are the backbone of a resilient national economy. Prioritising their development is critical to the future of the country. The government has come out with a variety of enabling mechanisms over the last few years.

India needs more such measures, especially in the current environment. The next decade will be the metamorphosis of India from an emerging power to an established economic powerhouse and MSMEs will be an important cog in the wheel on this journey.

thanks dristi ias

Drishti Mains Question Prioritising the development of the Micro, Small and Medium Enterprises (MSMEs) sector is critical to the future of the country. Critically analyse.

RISKS BANKS ARE FACING?

 

india what are the risks banks are facing?

ChatGPT

Banks in India, like elsewhere, face a variety of risks, which can broadly be categorized into the following types:

1. Credit Risk: This is the risk of default by borrowers or counterparties on their financial obligations. Banks in India face credit risk from loans, advances, investments, and other credit exposures.

2. Market Risk: This includes risks arising from changes in market prices, such as interest rates, exchange rates, and equity prices. Fluctuations in these can affect the value of a bank's assets, liabilities, and off-balance sheet items.

3. Liquidity Risk: This is the risk that a bank may not be able to meet its financial obligations as they come due without incurring unacceptable losses. Banks need to maintain adequate liquidity to fund their operations and meet withdrawal demands from depositors.

4. Operational Risk: This encompasses the risk of loss resulting from inadequate or failed internal processes, systems, people, or external events. Operational risks include fraud, cyber threats, legal risks, and human errors.

5. Legal and Compliance Risk: Banks must comply with a wide range of laws, regulations, and standards. Failure to comply can result in legal penalties, financial loss, or damage to reputation.

6. Reputational Risk: This refers to the risk of negative public perception, which can arise from any of the above risks or from poor business practices, ethical lapses, or adverse events.

7. Systemic Risk: This is the risk that disruptions to the financial system could impact multiple institutions or even the entire economy. Events like economic downturns, systemic frauds, or market crashes can pose systemic risks.

8. Interest Rate Risk: Banks in India, like elsewhere, face risks related to changes in interest rates, which can affect their net interest income and the value of their assets and liabilities.

9. Cyber Risk: With increasing digitalization, Indian banks are also exposed to cyber threats, including hacking, data breaches, and ransomware attacks.

10. Geopolitical and Country Risk: Banks operating internationally or dealing with international transactions are exposed to geopolitical tensions, changes in government policies, and economic instability in other countries.

Managing these risks effectively is crucial for banks to maintain financial stability, protect depositors' funds, and sustain long-term profitability. Regulatory authorities in India, such as the Reserve Bank of India (RBI), impose guidelines and frameworks to help banks mitigate these risks and ensure the stability of the banking system.

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