India’s Banks Have Doubled Up As Crisis Managers In The Past; Now They Should Step In To Help MSMEs Get Back On Their Feet

As a long-stranding critic of nationalisation of banks, I am appalled at the extent of value destruction that has happened due to them being managed by the public sector.

Unionisation, job security and lack of incentives are indeed problems that exist with our public sector banks – and they have been discussed, recorded, debated at length in several articles, government reports and TV debates.

There is, however, another important aspect that is critical and reflects the importance of banks in our private formal sector.

For an economy of the size of India with limited scale and stiff competition, expertise in the form of management skills and external consultancy is not available to a vast majority of Indian MSMEs (micro small and medium enterprises).

These firms work on stiff margins and often the owner provides managerial support across different departments of the firms. As is the case, most MSMEs don’t have a separate department such as human resources or finance.

For anyone who has run a small enterprise or a startup is aware that the owner has to often be the human resources (HR) manager while hiring, sales manager while pushing products and also the financial manager at the end of the month.

Of course, some of our taxation norms necessitate the need for external chartered accountants (CAs) to provide expertise with filing of goods and services tax (GST) returns and meeting with other statutory compliances.

However, the support provided by most such external CAs is limited to managing accounts, of auditing balance sheets and of meeting compliances.

This is what makes our banking system so important as often banks double up as an external business consultant for these companies.

Bankers, especially in the public sector space have often provided necessary advisory support to several small businesses such as assisting them with raising debt capital, helping them in setting up key business processes and often providing necessary supervision on their operations which instils a sense of financial discipline.

This may be an unpopular opinion because of India’s recent experience of frauds and non-performing assets (NPAs) in India’s banking space. However, there are also cases where bankers have gone beyond their call of duty in enabling businesses scale.

The key here is that unlike big corporations, which have proper divisions to help them raise capital, MSMEs often just have banks as their key source to raise capital.

Therefore, banks have played and probably will continue to play an important role in what happens to nearly 50 to 60 per cent of India’s formal economy.

This becomes more relevant in the present context, where companies find their cash positions as vulnerable and there is a lot of uncertainty regarding the future of economic activity.

Businesses, especially small businesses are going to be the worst hit as unlike big firms, they do not have access to complicated financial instruments that can help them raise capital needed to sustain their operations.

Without formal managerial expertise combined with limited resources to get external advice, a lot of them will depend on their nearest banker to provide them with both, funds and expertise on how to source them.

India’s public sector banks have always gone beyond the call of duty in service of the nation. Nobody can ever forget their contribution in making Jan Dhan Yojana a big success, and it is through those bank accounts that India has managed to protect the vulnerable during the Covid-19 crisis.

However, another call of duty awaits them as they now have to perform the critical task of helping MSMEs get back on track by providing them with both, adequate credit support and managerial expertise.

Their success will determine the pace at which our economy recovers and the extent to which we limit the economic costs associated with the crisis.

The author would like to acknowledge Dr Charan Singh as this article is a byproduct of a conversation on India’s banking system.