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Business News/ Opinion / Funding small firms
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Funding small firms

India needs to move to a financial system where large companies raise money through bonds while banks predominantly fund smaller enterprises

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Nirmala Sitharaman has again argued that high lending rates hurt the small companies providing most of the employment—just days before Urjit Patel takes over as the Reserve Bank of India governor.

It is a valid complaint but the minister is barking up the wrong tree. The central bank does not have any space to cut policy interest rates by two percentage points if it has to keep inflation under control as well as give depositors positive real interest rates. The answer lies elsewhere.

The lack of a vibrant corporate bond market makes large companies dependent on banks for funding. In effect, smaller firms get crowded out. This newspaper has often argued that India needs to move to a financial system where large companies raise money through bonds while banks predominantly fund smaller enterprises. We suggest that the minister should back bond market reforms to further this goal—even if these reforms have been championed by a certain Raghuram Rajan.

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Published: 29 Aug 2016, 12:18 AM IST
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