The Hindu Business Line : Big transition travails for small units

HISTORICALLY, the small-scale industries (SSIs) worked as growth engines in both the developed and the developing countries. Despite the synchronised global slump, SSIs acted as a prime mover in enhancing industrial growth, and generating employment.

Contrary to the position in other countries, SSIs in India continue to be defined solely in terms of Rs 100-lakh investment ceiling on plant and machinery. As recommended by the Study Group on Development of Small Enterprises (S. P. Gupta Committee), the orbit of financing needs to be enhanced from small to medium enterprises, the artificial distinction between small and medium enterprises (SMEs) eliminated and a three-tier definition for tiny sector (up to Rs 10 lakh investment in plant and machinery), SSI sector (Rs 10 lakh-Rs 100 lakh in plant and machinery) and medium sector (Rs 1 crore-Rs 10 crore in plant and machinery) adopted to enable SMEs overcome the travails of transition.

Pivotal role

The 36 lakh SSIs produce more than 7,500 products, promote entrepreneurship and catalyse industrial growth. They account for 95 per cent of all industrial units, 34 per cent of total exports and 192 lakh jobs.

In the post-WTO world of most favoured nation treatment, national treatment, freer trading system and predictable trading system, the SMEs are constrained by delayed payment of bills, technological obsolescence, inadequate working capital availability, marketing bottlenecks, weak infrastructure, lack of technological synergy between technology seekers and technology developers, high cost of patents and ineffective coordination across institutions. Stagnant employment in agriculture and large industry necessitate a renewed focus on SSIs to meet the needs of growth, capacity building and equity on a much larger canvas.

Winds of change

The abolition of `licence-quota-permit' raj shifted the focus from `protection' to `promotion'. Increased financial requirements of SSIs require exploitation of available potential with appropriate development and credit packages and systemic strengthening in terms of planning, policy and operations.

Measures such as mechanism for providing consultancy and advisory services through advisory service centres, information shops and national centre for communication in collaboration with related institutions, increased investment in research and development by public and private institutions, creation of enabling environment for higher efficiency, autonomy and self-sustenance could significantly stimulate local economic development.

Credit dispensation

Formal banking system provides a range of modalities and terms for loans for SSIs. Sub-sector specific promotional institutions incorporate credit programmes as an integral part of their portfolio. Informal credit channels provide a more efficient service at exorbitant rates of interest.

All these virtually parallel systems sub-served progressively larger credit needs of SSIs in expanding output, employment and exports and influenced both the development of forces of production and the relations of production in a chain of "cumulative causation''.

Term and working capital needs of SSIs are met by public and private sector banks, Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD), public sector banks (PSBs), Regional Rural Banks (RRBs), urban co-operative banks (UCBs) and foreign banks.

Despite PSBs allocating 40 per cent of their lending to the priority sector, many SSIs face difficulty in accessing bank credit because of their inability to provide adequate collateral security. State Financial Corporations (SFCs) worked as regional funding agencies by granting term loans for purchase of land/machinery and equipment/construction of factory premises for establishing new industries/modernising existing ones and participating in their equity base.

But a combination of structural, managerial and financial problems ails the SFCs. Their progressive financial deterioration not just wiped out their net worth but pushed them into the negative territory. Accordingly, the GoI amended the SFCs Act and set up the G. P. Gupta Committee for restructuring SFCs.

Flow of credit to SSIs

The S. L. Kapur Committee Report stressed that only 15-20 per cent of the credit needs of SSIs were met. PSBs, RRBs and SFCs increased the flow of credit to SSIs through bankable schemes. Twenty seven PSBs through over 45,000 branches, including 395 specialised SSI branches, meet the working capital needs of the SSIs. While outstanding credit to SSIs steadily rose from Rs 42,591 crore (1999), Rs 48,445 crore (2001) to Rs 49,743 crore (2002), the percentage share of SSIs in net bank credit (NBC) progressively declined from 16.1 per cent (1998), 14.4 per cent (2001) to 12.5 per cent (2002). Such consternation emanates from the difficulty of SSIs in surviving the screening of the credit mechanism of commercial banks, which pursue "reasonable risks and prudent stable returns". This disconnect between SSIs' need for funds and their raising of finance requires considering factors such as relaxed bank norms for declaring SSI units as NPAs by delayed payments, blockage of credit flow and the Securitisation Act. This was also strongly urged by the recent Parliamentary Standing Committee on Industry (129th Report on Credit Flow to the SSI Sector).

Dynamic policy initiatives

The GoI traditionally assisted SSIs through supportive policy measures emanating from the Industrial Policy Resolution, 1956. While some issues of the GoI's Mission for the Millennium: A Blueprint for Small and Village Industries (2000) have been resolved, several other issues still remain to be tackled. The blueprint stressed the creation of a sound policy environment to resuscitate the sector, encouragement to FDI, technology and modern management practices, simplification of industrial legislation, more responsive machinery, strengthening of credit delivery systems, facilitation of timely payment, rehabilitation of sick units, modernisation of small enterprises, extension of comprehensive marketing support, creation of an appropriate fiscal environment, focus on village industries, bridging of infrastructure gaps, entrepreneurship development, strengthening of bilateral and international cooperation and strengthening of IT support.

The Prime Minister's policy package with initiatives on finance, credit, marketing and technology during the National Conference for SSIs (August 30 and 31, 2000) is consistent with this approach.

Excise exemption ceiling for SSIs has been repeatedly enhanced from Rs 30 lakh in 1986 to Rs 50 lakh in 1998 and further to Rs 1 crore in 2000. The Third All-India Census of the SSIs, covering registered and unregistered units as also sick units for the first time, was conducted after 15 years.

Prescription for change

A multi-agency credit structure evolved in India to meet scarcity of long-term investments and the perceived risk-aversion of savers and creditors. Traditionally, term capital required for creation of fixed assets such as land, building, plant and machinery and other capital assets is raised from the market by issuing equity and/or debt instruments of banks and other institutional sources.

SSIs meet working capital requirements by own funds, equity support, sundry creditors, bank borrowings and other short-term borrowings. Timely and adequate credit is a pre-requisite of competitiveness. But, ultimately, the SSIs have to improve their productivity and efficiency.

Streamlining of legal and institutional framework of financial sector, application of market-oriented financing instruments, linking of small enterprise sector to formal capital markets, introduction of innovative financing techniques with simultaneous subsidisation of learning costs (rotation funds, leasing, factoring, securitisation) and introduction of new and variable techniques for securing loans (forms of joint liability) are necessary.

Specification of guidelines relating to extension of credit by a financial institution to different categories of small enterprises, norms regarding quantum, proportion, method of computation, completion of formalities, revival packages, margins, collateral security, timely disposal to ensure expeditious flow of credit, both long term and working capital, to the small enterprises are also needed.

Different norms may be established for various categories of small enterprises differentiated on rational criteria, financial institutions and credit facilities such as term loans, working capital loans, and so on.

Future roadmap

The objective process of economic reforms significantly transformed the Indian business setting. The homogenising influences of cost, quality, service and speed stalk Indian organisations in their pursuit of "thinking globally, acting locally". As these problems grow worse, the stakes rise, necessitating a fundamental reorientation of strategies by SMEs to successfully meet the onslaughts of the progressive across the board liberalization.

Post-1991, the SSIs have almost always outperformed the industry. But the nature and sustainability of such successes over the long haul have evoked debates. Political will and determination, technological modernisation, marketing with a focus on exports, adequate fulfilment of credit needs by streamlined policy framework, provision of institutional and infrastructural support are needed for SMEs to move up the value chain.

Things are not easy for SSIs with both the sector and all FDIs — IDBI, SIDBI, IFCI, ICICI, IIBI and IDFC — being at the crossroads. But this is not the end of the world provided the millennium growth agenda is implemented with alacrity. The background developmental processes need not be taken as exogenously given. What is needed is an action plan for defining strategic customer segments and value propositions, establishing enterprise-wide customer guiding principles, identifying specific synergies, variations and gaps among business units and launching significant customer initiatives.

A comprehensive strategy and collaborative efforts by the government, private and non-formal sector are necessary to realise Tenth Plan (TP) objectives of 8 per cent GDP growth, 10 per cent industrial growth and one million jobs a year.

The Working Group on SSIs for the Tenth Plan emphasised deployment of Rs 63,357 crore as long-term capital and Rs 123,000 crore as working capital in 2002-07 for multi-dimensional and multi-layered development of SSIs.

The GoI's announcement on January 9, 2004 about `operationalising' within four weeks a fund with an initial corpus of Rs 10,000 crore over two years to finance SMEs is welcome, but its implementation needs to be carefully monitored to make a perceptible difference on the ground.

(The author is Chief Economist, Canara Bank, Bangalore.)