Re-examine financial sector architecture to build MSMEs better: Pronab Sen

India needs to re-examine the architecture of the financial sector to revive the Covid pandemic-hit Micro, Small and Medium enterprises, said Pronab Sen, economist and former Chief Statistician of India. 

Delivering a lecture on “Build Back Better – the Role of Finance”, Sen said that India would have to build the MSME sector back. "Let's build it better than what it used to be", he said. "While the corporate sector was performing strongly, the non-corporate sector was not – in fact, it was damaged", Sen added.

In the recent past, the damage that has been done to the MSME sector in the country, a large part of the market share moved into the hands of corporate India which led to significant increase in the pricing power of the corporates, Sen pointed out.

“The kind of competition they were getting at local levels from the non-corporate entities is no longer there. So, the ability to pass on cost increases to the consumer has become very much easier today than it was previously. And that’s not going to get better unless the MSME sector comes back.”

At the heart of building the MSMEs better, is not fiscal intervention, but the way the financial sector is structured. The banks were willing to lend to some of the MSMEs, but not to the vast majority. This was a problem even earlier but earlier we had the NBFCs which came and filled in that particular gap. Today, the NBFCs are just as much in trouble as the MSMEs.

According to Sen, the relationship between a bank and NBFC needs to be not of a borrower and a lender as it is today, but that of a partner.

“If we need to wish to build back better, we will need to re-examine the architecture of our financial sector . Otherwise our worst case scenario is our MSME sector will never revive and the best sector scenario is we will go back to where we were which was sub-optimal”, said Sen.

Source: Business Standard  e-newspaper