The Hindu Business Line : Funding SMEs

HAD THE BANKING system cared to finance small and medium enterprises (SMEs) in the normal course, the Finance Minister, Mr P. Chidambaram, may not have had to ask public sector banks to increase their lending to this sector at a minimum growth rate of 20 per cent year-on-year. No doubt this demand of his is less stiff than the target suggested by the Working Group on fund flows to the SSI sector. The Group had said that 40 per cent of Net Bank Credit must go to the priority sector (including small-scale industries). The Additional Secretary (Banking) in the Finance Ministry, Mr Vinod Rai, has clarified that only funding of SSIs and not the medium-scale sector will form part of priority sector lending. Nevertheless, the banks have a tough road ahead.

The New Delhi package contains a one-time settlement (OTS) and a Corporate Debt Restructuring deal for the non-performing assets of the SMEs, akin to that for the large, corporate sector. This could bring down the interest load on the SMEs but hurt the banks a bit. So far a medium enterprise has been defined in terms of its investment in plant and machinery — from Rs 1 crore to Rs 10 crore — but now the Government has accepted the Working Group's plea for re-defining them on the basis of turnover. Seemingly, the New Delhi package has taken quite a few bits from the Report of the Working Group, which traced the slow-down in the lending to the SME sector "to risk aversion arising out of a high proportion of the lending becoming non-performing." This argument cannot hold, as messy corporate accounts have straightened out after banks rolled out loan remission policies put in place by the Reserve Bank of India.

Another problem is that quite a large number of SMEs are linked to heavy-weight corporates (especially those in the steel and automobile sectors) and the Working Group has made a case for funding corporate-linked SME clusters. The glitch here is that the small units are not paid promptly by their buyers despite the Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act. "Implementation of the provisions of the Act remains ineffective," rues the Working Group. It is now admitted that the old ways of funding the SME sector have to change. Bank funds may have to be funnelled through Non-Banking Finance Company-type micro finance agencies or bank-promoted SPVs (special purpose vehicles). Till some time ago State finance corporations (SFCs) offered lines of credit but they have mostly turned sick as the SME sector today is short on technology, marketing and costing.

One cannot wish away the perception widely prevalent among bankers that lending to this sector is risky. There is a proposal to set up yet another credit rating agency by SIDBI and CIBIL, when one thought the extant outfits could do the job. Bank funds to the SME sector come at interest rates of around 13 per cent, if not more, and bankers justify the premium citing the quality of assets. What is left unsaid is that the SME sector cannot any more depend on Government-mandated reservation or preferential treatment when increasingly it will be quality of the product and its acceptance in the market that will determine the financial prospects of any unit. Should industry be segmented into tiny, small and medium sectors for funding? Should not the merit of the balance-sheet be the lone criterion? For how long should the spoon-feeding continue as these funding packages are nothing but a cost on depositors?

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