Chairman CS Setty on Friday pitched for the creation of a market infrastructure institution to track the end-use of funds borrowed or raised as equity by small businesses.
A “viable mechanism” is needed to ensure that the funds are used for the intended purposes, Setty said in remarks which come amid heightened concerns on the subject of end-use of funds.
“We will require a viable mechanism to track the actual use of these funds to ensure that the funds are utilised for the purposes they have been raised for, probably through the establishment of a separate market infrastructure institution with powers to track the use of borrowed funds or the funds raised through equities,” Setty said.
Addressing a conference organised by the SEBI-promoted NISM, Setty said the creation of such a platform will provide comfort to lenders as well as investors, and make pricing more competitive.
It can be noted that the RBI has been pressing lenders to monitor end-use funds, especially in case of borrowings by small businesses.
In March last year, the central bank asked lenders issuing business credit cards to monitor the end use of funds. There have also been reports of some unsecured borrowings being used to punt on the riskier segments of the derivative markets.
Setty said capital will be required in big quantum in order to achieve the growth aspirations, and given that the youth will be a big source of the funds, it is the responsibility of mutual funds and primary markets to ensure that the money does not go into derivative segments as has been the case in recent years.
Achieving the aim of developed India by 2047 would entail a GDP growth of 8-9% till 2036, Setty said, giving out estimates on the capital which will be needed over the next decade.
The domestic saving rate has to rise from the present level by at least 3.50% points to 33.5% for achieving the growth agenda, he said, adding that the role of the capital market will also be important and we will need depth in the country’s equity markets.
Setty said Micro, Small and Medium Enterprises (MSMEs) tend to lack proper financial records or the financial resources to get external credit ratings, while banks also find it challenging to price the risk involved in lending to such entities.
“For greater involvement of capital markets in funding these important pillars of the economy, we will need to find a way to formalise and collate all these disparate sources of information and create a repository to enable investors to correctly price the credit risk on these MSMEs,” he said.
Given the green financing imperative, it is also necessary to identify institutional gaps that need to be bridged to mobilise funding with minimum possible impact costs, he said.
