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5) MSME sector has immense economic significance for India but lending to them poses acute challenges. Discuss.(250 words)

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TopicIndian economy – issues

5) MSME sector has immense economic significance for India but lending to them poses acute challenges. Discuss.(250 words)

The hindu

Why this question

Raghuram Rajan in his report to Parliament Estimates Committee on bank non-performing assets (NPAs) cautions about the looming financial crisis on account of loans given to MSME sector. MSME sector forms a large part of the economy of India and understanding their potential, and the likely issue is important for GS3.

Key demand of the question

The question expects us to focus on the status of MSME sector, their potential and the likely crisis that can arise as a result of the efforts of the government to ease credit access to them. We need to highlight the pros and cons of lending to MSME sector and give a way forward.

Directive word

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer

Introduction – Highlight the contribution of MSME sector to the economy in numbers by talking about their share in GDP, exports etc

Body

  • Discuss the immense potential of MSME sector for India. Based on this potential, explain the various schemes brought out by the government to promote capital access for MSME sector – MUDRA.
  • Flag the issue highlighted by Mr Rajan in his report – MUDRA loans while popular, have to be examined more closely for potential credit risk. The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency
  • Discuss the positive impact of MUDRA for MSME sector – how it has alleviated concerns of the sector related to capital requirements, led to creation of new jobs etc
  • Highlight that according to industry estimates, gross non-performing assets arising out of Mudra loans vary between 10 and 15 percent, especially in some pockets. Mention the impact of demonetization on MSME sector and the challenges arising for the sector due to cash crunch. Discuss the impact of GST on MSME sector, and the problems that all these factors have brought in related to loan repayment.
  • Analyze the future course of action required to deal with this challenge – professionalising bank boards with appointments done by an independent Banks Board Bureau; inducting talent from outside banks to make up for the deficit within; revising compensation structures to attract the best talent; and ensuring that banks are not left without a leader at the top etc

Conclusion – Give your view on the comments made by Raghuram Rajan in his report and discuss the way forward.