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P. Devarajan

IF the banking system had cared to finance the small and medium sector as normal banking custom, Mr P. Chidambaram, the Union Finance Minister, might not have come up with a minimum 20 per cent year-on-year funding growth target.

This is better than a uniform target in priority sector lending (including SSI) at 40 per cent of net bank credit suggested by the Working Group on fund flows to the SSI sector.

Mr Vinod Rai has clarified that only funding of SSIs, and not the medium-scale sector, will form a part of priority sector lending. The New Delhi package contains a one-time settlement (OTS) and a corporate debt restructuring (CDR) for NPAs, akin to that for the corporate sector, which could bring down the interest load on SMEs and bite the banks a bit.

A medium enterprise has been defined as one with investment in plant and machinery above Rs 1 crore and up to Rs 10 crore while the Working Group has pleaded for defining SMEs on the basis of turnover while favouring the investment criteria in the interim, a suggestion the Government has accepted.

Seemingly, quite a few bits have been taken from the report of the Working Group which traced the slowdown in 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 turned alive after loan remission policies put in place by the RBI. Quite a large number of SMEs are linked to heavyweight corporates (like in steel and automobiles) 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 despite the existence of the Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act. "Implementation of the provisions of the Act remains ineffective," admits the Working Group.

It is now admitted that the old ways of funding the SME sector have to give place to NBFC-type micro finance agencies with the banks offering the funds; or banks could promote SPVs dedicated to this sector. 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.

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 this sector come at around 13 per cent if not more and bankers justify the premium based on the quality of assets.

What is being left unsaid is that the SME sector cannot any more bank on reservation, preferential treatment, shoddy quality and the rest when increasingly markets determine the financial status of any unit. Do we at all need to break up industry into tiny, small and medium sectors for funding? Should not merit of the balance sheet be the lone criterion? For how long should bottle-feeding continue?

That could put an end to funding packages which are nothing but a cost on the depositors.

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