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Interview: 'Banks Need to be Sensitised on MSME Lending to Meet $5-Trillion Economy Mark'

Pradeep Multani, president of the PHD Chamber of Commerce and Industry, talks about how the shortage of raw materials and high input prices are posing a challenge to small businesses in India.

Inflation pressures are looming ominously on the Indian business horizon. While the margins of large domestic and multinational corporations have come under pressure, they still have the balance sheet heft to absorb raw material price shocks and the elbow room to pass on the cost to consumers.
However, medium small and micro enterprises (MSMEs), especially mom and pop stores, across India are not in the same boat as the large companies and are far more vulnerable to the onslaught of raw material cost hikes and inflationary commodity cycles.

Operating from a small asset base, MSMEs’ primarily lack abundant access to formal banking capital and often find their working capital locked up with large organisations which have longer payment cycles. Unfortunately, India’s MSME sector continues to languish despite the pivotal role it plays in the Indian economy. As per National Sample Survey Office data, it provides viable employment to over 11.10 crore and commands approximately a 31% share of India’s GDP.

In the post-pandemic scenario, the growth objectives of the economy, as well as the sector, can be met once banks are sensitised to the importance of lending to MSMEs, says Pradeep Multani, president of the Punjab Haryana and Delhi Chamber of Commerce and Industry.

Edited excerpts from an interview with The Wire are below.

Indian MSMEs are going through a rough patch the likes of which they have never seen before. First the recurrent waves of pandemic and now the Russia-Ukraine war. Raw material price escalation has increased input costs for a wide swathe of MSMEs. What can be done to alleviate their pains?

Amid rising prices of raw materials, there is a need to ensure enough liquidity in the hands of MSMEs. Smooth functioning of public sector units (PSUs) without disruption due to payment problems is of paramount importance in these dynamic times. The Government should provide adequate funds to the PSUs, so that they may be able to release the payments of the MSMEs and other vendors urgently to provide them with liquidity and facilitate them to run their businesses.

The cost competitiveness of MSMEs exporters should be improved and a level playing field should be created. Reduced costs of doing business and a level playing field in the country will not only increase the competitiveness of our exporters but also reduce imports of the items where India has domestic capabilities.

As higher input costs loom, there is talk that Indian banks are in for a fresh spell of new MSME NPAs. MSMEs don’t have the same capacity to absorb higher input costs as large companies. What kind of policy measures can be of help to MSMEs at this time?

The shortages of raw materials, high input prices, among others, are impacting production possibilities and anticipated sales volumes and posing a challenge to the small businesses to operate. At this juncture, there is a need to address the high commodity prices and shortages of raw materials to support the consumption and private investments in the country.

Also, an integrated development of the logistics sector in the country would inform, clarify, strengthen and prioritise the key objectives, focus areas and the governance framework for logistics in India. This would also provide impetus to MSME sector in the country through a cost-effective logistics network.

Ratcheting up of crude oil prices will further contribute to a ballooning of the Current Account Deficit as a percentage of the GDP. Further, it will stoke retail and wholesale inflation while retarding consumption. How do you see the coming quarters of FY ’23 pan out?

With rising crude oil prices, the import bill of India on crude oil would increase, which could translate into widening pressure on the current account balance. Further, the rising crude oil prices would further add to the inflationary pressure through effect on retail prices of petrol and diesel along with upside pressure on the prices of other commodities.

Given that there is no major development in the negotiation talks so far between Russia and Ukraine and continuous sanctions being put on Russia, the price of crude oil may remain volatile in the upward zone in near term. However, historically, without adequate demand in world economy, crude oil prices have not sustained beyond $ 100 per barrel for much time. Though speculators will try to sustain the prices at a higher level, constructive dialogue between Russia and Ukraine would be crucial to provide respite to the burning fuel.

The prospects of a stagflation descending on India are being increasingly voiced by economists and commentators. What policy measures are in order to avoid such a fate?

India is currently witnessing cost-push inflation. The inflation rates have been stoked by the high crude oil prices as both the wholesale inflation and retail inflation have registered an uptick in February 2022.

At this juncture, supply-side measures from the government have substantially supported efforts at containing inflationary pressures.

Further, the innovation measures announced by the RBI have aimed at maintaining liquidity in the economy. Going forward, as the supply side issues due to geo-political developments get resolved through constructive dialogue between Russia and Ukraine, the prices of crude oil will soften and provide respite from the high inflation rates in the coming months. 

Also read: A Perfect Inflationary Storm is Brewing at the Intersection of India’s Coal and Power Sectors


The pandemic and the accompanying lockdowns brought about unprecedented levels of unemployment. Do you think with rising commodity prices and entrepreneurial spirit taking a beating in the future thanks to higher interest rates, we would witness a similar return to joblessness and unemployment?

After experiencing the daunting impact of pandemic COVID-19 and resultant restrictions on economic activity and physical movements of goods and people, the Indian economy is experiencing a higher growth trajectory in recent months supported by a strong and sustained performance of the key economic indicators on the back of supportive policies of the government, calibrated measures by RBI, rapid vaccination drive in the country and improved consumer and business sentiments.

Post the third wave of COVID-19, the employment scenario has significantly improved as all economic activities are resumed and various companies are undertaking recruitment processes. The situation looks promising as the overall manufacturing PMI for India has registered an increase in February 2022 against the previous month, which reflects growth in factory activity. Similarly, service PMI has also registered an increase in February 2022 as compared to January 2022.

For a long time, MSMEs have had problems accessing credit from formal banking channels. The matter is further complicated as large private and public companies take an extraordinarily long time to disburse payments effectively lengthening the working capital cycle for MSMEs.

What can be done to help MSMEs in this regard?

Delay in the availability of finance and credit, timely payment of dues and adjudication of pending dues are some of the sensitive issues for MSMEs, especially in the times when businesses are moving ahead after the daunting impact of COVID-19 scenario.

At this juncture, the focus should be on ensuring the provision of hassle-free disbursement of loans vis-à-vis enhanced liquidity for MSMEs, especially in rural sectors. The banking sector must fully percolate the significant cut in repo rate announced by the RBI during the last two years. The banks should come out with innovative financing products to match the requirement of MSMEs. It is desirable that no prepayment charges be levied by banks for early payment of loans by MSMEs.

There is need to change the mindset of bankers to sensitise them about the importance of lending to MSME sector which can meet the aspirations of the country to achieve the $5 trillion economy.