State Bank of India (SBI) Chairman CS Setty has proposed the establishment of a dedicated market infrastructure institution to ensure that funds borrowed or raised as equity by small businesses are used for their intended purposes. Speaking at a conference organized by the Securities and Exchange Board of India (SEBI)-promoted National Institute of Securities Markets (NISM), Setty emphasized the need for a “viable mechanism” to track the end-use of such funds.
“We need a reliable system to monitor how these funds are utilized, ensuring they are directed towards their intended goals. A separate market infrastructure institution with the authority to track the use of borrowed or equity-raised funds could address this issue,” Setty said.
Addressing Concerns on Fund Misuse
The proposal comes amid growing concerns about the misuse of funds, especially by small businesses. The Reserve Bank of India (RBI) has also highlighted the importance of monitoring the end-use of funds. In March 2023, the RBI directed lenders issuing business credit cards to ensure proper oversight of fund usage. Reports have emerged about unsecured loans being diverted into high-risk areas, such as derivative markets, further underscoring the need for robust monitoring.
Setty noted that such a platform would provide greater confidence to both lenders and investors, potentially leading to more competitive pricing of loans and investments.
Capital Needs for Growth
Highlighting India’s growth aspirations, Setty stated that achieving the goal of a developed India by 2047 would require sustained GDP growth of 8-9% until 2036. This ambitious target would demand significant capital infusion over the next decade.
Setty emphasized that the domestic savings rate must rise by at least 3.5 percentage points to reach 33.5% for the growth agenda to be met. He also stressed the importance of deepening India’s equity markets to support this capital requirement.
Challenges for MSMEs
Discussing the challenges faced by Micro, Small, and Medium Enterprises (MSMEs), Setty pointed out that these businesses often lack proper financial records or external credit ratings, making it difficult for banks to assess and price the risk of lending.
“For greater involvement of capital markets in funding MSMEs, we need to formalize and consolidate various sources of information. Creating a central repository would enable investors to accurately price the credit risk associated with these businesses,” he said.
Green Financing Imperative
Setty also addressed the importance of green financing, calling for the identification and bridging of institutional gaps to mobilize funds with minimal impact costs. He highlighted the growing need for environmentally sustainable investments as India pursues its development goals.
The proposal for a dedicated institution to monitor fund usage reflects the increasing focus on accountability and transparency in financial markets, particularly for small businesses and MSMEs, which are crucial pillars of the Indian economy.
