The Government has conceded that Indian economy runs on the wheels of the micro, small units. It has accepted the fact that MSME sector accounts for about 45% of the manufacturing output, 40% of the total exports of US $ 185 billion, providing roughly employment to an estimated 60 million workers spread over 26 million registered and unregistered enterprises. The Government has reckoned that out of the 1.5 million registered units, 95 % of the units are micro enterprises (investment in plant and machinery up to Rs 25 lakhs) and 4.7% are small enterprises (investment upto Rs 5 Cr). It means only 0.3 million units are in the medium category (between Rs 5 cr- Rs 10 Cr investment level).
The prime Minister’s task force on MSME which submitted its report in January 2010 has nailed the claim of the banks that there was no impediment for these small and tiny units to avail bank Credit. As a matter of fact, the greatest problem faced by the MSEM enterprises was availability of Credit for investment, improvement and working capital. The Government concedes the superlative performance of the sector to the GDP and employment Growth against all odds including accessing funds at the right time unlike large companies who have various avenues like primary market, ssecondry market, debentures, commercial paper, foreign depositary bonds, listing in London/NY stock exchanges, etc.
The Indian government has accepted the view of the task force that commercial banks which include nationalized banks mainly give priority to the corporate sector with better credit rating and provide easy credit at sub prime rates. For this, one of the RBI Dy Governors said that the Banks were not loathed to give credit to these micro and tiny units. Their spread was in villages which were unbanked areas, as the Indian banking system covered only 25% of the districts in India.
It has to be seen how far the banking sector would provide Credit at affordable rate of interest that is after the introduction of the ‘base rate’ which should have come about. Already the big brother of Banks, State Bank of India has begun to murmur that the conditionality of fixing ‘base rate’ must be extended by at least an year for all the Banks to switch it, because the present borrowers would insist on the BPLR rate of interest be applied to their accounts. Surely, when the sub-committee of RBI meets on July 27, 2010, this amendment would be made in the notification because you cannot have two sets of interest rates for Credits.
Banks dependence on SIDBI to promote the SME industry has been found to be inadequate. Even the SHG concept of SIDBI, Cluster level funding etc have not been successful because SIDBI is yet to have a grip on the spread of tiny and micro industries. Their problems are not even, with different problems for different sectors. The expertise to provide escort service is not available with SIDBI. Government is also talking about NABARD which had focused on rural enterprises. Ditto is the problem here.
The SME-CDP programme of the Minsitry of Micro, Small and Medium Enterprises have been found to be a non starter for the SME Clusters. The basic problem with the Scheme is its inability to stretch to a geographical location having similar lines of segmentation of the enterprise. Its divisions like Development, Commercial etc are only theoretical abstracts, as any cluster should be a profit head by itself and it should have a commercial objective, otherwise it will fail. No body has bothered to evaluate the Scheme, because it is largely governed by the UNIDO Concept of Clusterization, even though India requires a different concept and model to create growth oriented Clusters.
It is an unfortunate fact, that MSMEs are not aware of the various developmental schemes, geographic specific interventions, and sector specific initiatives. It is true that the entire paradigm of development has changed and inclusive growth has to be achieved by participatory growth. The Ministry of Micro, Small and Medium Enterprises, need a total rehaul, if nearly half of India’s export and manufacturing output need to sustain the vigours of international and national competition.
In India, small businesses were an awesome lot, and the government and the Banks shunted it. But in the United States, the Government was keen to making credit accessible to sound small businesses which were crucial to their (US) economic recovery and so should be front and centre among our (US) current policy challenges. In India, the Bankers hold a grudge against SMEs as unviable.
The Federal Reserve had brought in capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan Facility (TALF programme). In the United States, around 8, 50,000 small business loans were financed in part by securities whose issuance was supported by TALF.
While Indian Banks were keeping Crores of rupees in their currency chests, in the US, loans to the tune of $ 710 billion granted in the second quarter of 2008 had come down to $ 670 billion in the first quarter of 2010.
An important but difficult to answer question is, How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn and how much by restricted Credit ability. United States is thinking of additional effective action hearing first hand from knowledgeable people who can speak with diverse perspectives about the challenges facing small businesses. The term ‘small business’ encompasses a heterogeneous mix of enterprises, so that one should be wary of one-size fits-all-solutions. But in India, knowledgable advice is unwanted. Secondry solutions are enough.
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