Small and ignored

The myopic proposal to create a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises.

At an SME Loan Expo organised by Corporation Bank in Coimbatore. The government has announced that loans to SMEs from public sector banks will be brought under priority sector lending.

IN 2010, a report prepared by the then Prime Minister Manmohan Singh’s task force on micro, small and medium enterprises (MSMEs) flagged a number of impediments to the growth of these industries. The Narendra Modi-led National Democratic Alliance (NDA) government’s Budget this year has envisaged the creation of a dedicated bank for refinancing microfinance institutions (MFI) that will lend money to these industries. However, the government is yet to take concrete measures to resolve a number of concerns that have continued to thwart the growth of small and medium enterprises (SMEs) over the years.

The large number of SMEs in India (about 5.77 crore, according to a National Sample Survey Office survey of 2013), which generate considerable job opportunities, continue to find it difficult to gain access to finance. A number of recommendations of the 2010 report are yet to be implemented. Also, the model of the proposed bank based on MFIs has come under scrutiny, given the record of these institutions in charging exorbitant interest rates and employing coercive tactics of recovery.

According to the announcement in Union Budget 2015, the Micro Units Development and Refinance Agency (MUDRA) Bank is expected to partner with coordinators at the State level to provide finance to SMEs. A corpus of Rs.20,000 crore has been allocated to the bank. The Ministry of Finance said in an official statement on March 1 that the bank would lay down guidelines for micro and small enterprise financing; business, registration, regulation and accreditation of MFI entities; promoting right technology solutions; and formulating a credit guarantee scheme for loans given out to micro enterprises. The government has also announced that loans to SMEs by public sector banks are to be brought under priority sector lending.

A separate sub-limit of 7.5 per cent has been created within the priority sector lending norms for micro enterprises. The Union Budget further proposed the setting up of a Trade Receivables Discounting System (TreDs), an electronic platform that will facilitate financing of trade receivables from corporates and other buyers through multiple financiers.

Concerns of SMEs

The 2010 report had pointed out several institutional problems. It observed that the high cost of credit, requirements of collateral, limited access to equity capital, lack of access to global markets, and the absence of a mechanism for the revival of sick enterprises were some of the major concerns of SMEs.

The report had also recommended a series of measures to address these concerns. The task force had recommended a target of 20 per cent year-on-year growth for micro and small enterprises lending by commercial banks. It had also advocated a public procurement policy for MSMEs that would mandate a goal for government departments and public sector undertakings (PSUs) to reach a target of at least 20 per cent of their annual purchases from SMEs and report the same in their annual reports.

It had proposed that the government should earmark an additional public spending of Rs.5,000-5,500 crore over the next three to five years to deal with deficiencies in the existing infrastructure and institutional set-up of SMEs.

Five years after the report was published, many of these recommendations remain on paper. The problems of SMEs getting easy access to credit from public sector banks remain. The myopic proposal of creating a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises.

Speaking to Frontline , Jayant Davar, chairman of the northern regional committee of MSMEs of the Confederation of Indian Industry (CII), said: “The fundamental problem in the approach to the issue of making available credit for SMEs is that there is no concept of development banking with the intent of nation building and a separate corpus of funds is still not set aside for the banks to be able to give out as loans to these industries. The banks are still averse to taking on the risk of giving out loans to SMEs. Over the last three months, the CII has been running a credit facilitation centre which brings together banks, MSMEs and credit-rating agencies across the country to make credit easily available to SMEs. About Rs.100 crore has been disbursed to SMEs across the country as a result of this initiative. There is an attempt to bring the banks on board through seminars, road shows and interactive sessions. This initiative has led to some positive results. But a lot more remains to be done by the government to increase these industries’ access to banks.”

Another informed industry source, who has worked closely with a number of SMEs, pointed out some of the common problems that persisted. “The creation of a Credit Guarantee Fund Trust by the Ministry of MSME and the Small Industries Development Bank of India [SIDBI] last year was meant to facilitate the flow of credit to the sector without the need for collateral or third-party guarantees. This scheme was meant to provide a cover for a credit facility up to Rs.1 crore for an annual service charge and a guarantee fee to be paid by the borrower. However, across the northern States, banks continue to insist on a collateral for loans below Rs.1 crore. The insistence on collateral creates obstacles for the small players, who have no financial security. It also creates impediments in the process of expansion of business for small players who cannot avail themselves of a second loan. Another issue that a lot of these units face is the delay in payment by big corporations by about 30 to 60 days and sometimes more, which affects their working capital cycle. Also, the debt to equity ratio [a measure of a company’s financial leverage, which shows what portion of debt and equity the company is using to finance its assets] of most SMEs hovers around 4:1. In the 2014-15 Union Budget, Finance Minister Arun Jaitley had announced the setting up of a Rs.10,000 crore equity fund to boost capital flow to SMEs. This fund is still lying unutilised. The SME-specific branches of banks are also not proactive in disbursing loans to the SMEs,” the source said.

It is learnt that before the Union Budget was finalised this year, the CII had submitted a set of recommendations to the government to address the concerns of SMEs. The industry body had recommended, among other things, compulsory procurement of materials by public sector units from SMEs, the setting up of common research and development facilitation centres by the government, and statutory guidelines to stipulate penalties or interest for big corporations which delay payments to SMEs. These recommendations were not reflected in the Union Budget.

Also, it is important to note that some of the recommendations of the 2010 report on SMEs are yet to translate into concrete action. The most important among these are the proposed public procurement policy mandated for PSUs to buy materials from SMEs and the mandated 20 per cent year-on-year growth in lending to SMEs by commercial banks.

Problems with the MFI model

The proposal to run the MUDRA Bank on the MFI model has also come in for criticism. Sudha Sundararaman, national vice-president of the All India Democratic Women’s Association, highlighted some of the existing problems with the MFI model of financial inclusion. “The proposal to route the funding for the new bank through MFIs is a move towards increasing the profits of these institutions and encouraging the private sector instead of strengthening public sector banks. Our women’s groups working in the States of Odisha, Karnataka and Andhra Pradesh continue to report large numbers of women falling into the debt trap because of the exorbitant interest charged by MFIs. MFIs continue to function largely as exploitative institutions and not as arbiters of financial inclusion. About three months ago, women in Odisha united in an effort to refuse to pay the exorbitant interest rates charged by MFIs. There is an ongoing movement in Andhra Pradesh by women to strengthen the linkages between banks and self-help groups [SHGs] and avoid dependence on MFIs,” she said. “The government has to reach out to SMEs with substantial allocation of funds. These are labour-intensive industries which generate considerable employment. They continue to have problems with credit availability. In a situation where the government clearly sides with large corporations, small industries are facing challenges of survival.”