The Chairman of the State Bank of India, CS Setty, advocated on Friday for establishing a dedicated market infrastructure institution aimed at monitoring the utilisation of funds obtained by small businesses, whether through loans or equity. Setty emphasised that a “functional mechanism” is crucial for ensuring that the capital raised is applied for its intended purposes. These statements were made amid growing concerns over fund allocation.
Highlights
Proposed Tracking Mechanism
Setty stated, “We will require a viable mechanism to track the actual use of these funds to ensure that they are utilised for their intended purposes. This could be achieved by creating a distinct market infrastructure institution with the authority to monitor both borrowed funds and equity capital.” He made these remarks while addressing a conference organised by the SEBI-supported National Institute of Securities Markets (NISM).
Benefits of a Dedicated Institution
The establishment of such a platform would offer reassurance to both lenders and investors, potentially fostering increased competitiveness in pricing.
RBI’s Ongoing Efforts
It is noteworthy that the Reserve Bank of India (RBI) has been urging banks to closely oversee fund utilisation, particularly concerning small business loans. In March of the previous year, the central bank instructed financial institutions providing business credit cards to monitor how these funds are being used. There have also been reports indicating that some unsecured loans have been misallocated to high-risk segments of the derivatives market.
Capital Requirements for Growth
Setty highlighted that a substantial amount of capital will be essential to realise growth ambitions. With youth emerging as a significant source of this funding, he stressed that mutual funds and primary markets must ensure that investments do not flow into derivative segments, as has been the trend in recent years. “Achieving the vision of a developed India by 2047 would necessitate a GDP growth rate of 8-9% until 2036,” Setty stated, providing insights into the capital requirements anticipated over the next decade.
Increased Savings and Capital Market Role
Setty further indicated that to fulfil the growth agenda, the domestic savings rate must increase from its current level by at least 3.50 percentage points, targeting 33.5%. He underscored the crucial role capital markets play, emphasising the need for deeper equity markets within the country.
Challenges for MSMEs
Setty pointed out that Micro, Small and Medium Enterprises (MSMEs) frequently encounter difficulties related to adequate financial documentation and the resources necessary to obtain external credit ratings. Similarly, banks face challenges in accurately assessing the risks linked to lending to these businesses.
Need for a Comprehensive Repository
“For enhanced participation of capital markets in financing these essential segments of the economy, we must formalise and consolidate the various sources of information available and create a repository. This will enable investors to accurately assess the credit risks associated with these MSMEs,” he noted.
Green Financing Initiatives
Given the urgent need for green financing, Setty also stressed the importance of identifying institutional gaps that must be addressed to mobilise funding with minimal impact costs.