The Hindu Business Line : Demand-side constraints in SSI credit

SUPPLY-SIDE constraints affecting credit to small-scale industries (SSIs) have been extensively deliberated by various expert committees. However, of late, besides supply-side impediments, demand-side constraints too are affecting credit growth to the sector. This is the situation despite serious efforts taken by the Government, the RBI, SIDBI and banks to increase the credit flow.

There is gross under-utilisation of subsidy under the Credit Linked Capital Subsidy Scheme (CLCSS) and the Technology Upgradation Fund Scheme (TUFS) and low utilisation of the SME Fund of SIDBI despite a number of initiatives undertaken to make them SSI-friendly.

The measures include reduction in interest rates, increase in incentives, simplification of procedures, liberalisation/expansion of eligible items and list of industries, close monitoring of progress under these schemes by the Government/SIDBI, and proactive measures taken to encourage SSIs to make use of the facilities under these schemes.

Of the Rs 600 crore of CLCSS funds earmarked for five years, only around Rs 20 crore has been utilised during the period.

Similarly, performance under TUFS over the past five years has been far below expectation in terms of investment in the textile and powerloom sectors. The powerloom sector, which accounts for 68 per cent of the total cloth production at present, got only 1 per cent of the sanctioned amount under the scheme.

During financial year (FY) 2005, Rs 1,833 crore was disbursed out of the SME Fund of Rs 10,000 crore envisaged to be utilised over two years, that is, FYs 2005 and 2006. Less than 20 per cent utilisation of this Fund should be seen in the background of buoyant GDP growth and industrial growth of over 8 per cent in FY 2005.

The Tenth Plan estimates the setting up of nine lakh SSI units. It envisages term credit and working capital from banks/FIs of Rs 63,000 crore and Rs 1,23,000 crore, respectively, to the sector over the Plan period. There is no dearth of funds. However, discussions with banks and State Financial Corporations (SFCs) underline the fact that demand for credit for green-field manufacturing projects in the SSI sector are few and far between.

Much of bank credit flow is for expansion/modernisation and service sector projects such as hospitals, hotels, shopping malls, multiplexes, and so on, which do not really fall under SSIs.

The system is facing `demand' problem from potential creditworthy borrowers. The factors which impact credit demand include:

Manufacturing investment is affected by uncertainties created by trade liberalisation and globalisation of supply chain management of goods and services. In the context of economic globalisation, inadequacies of knowledge management and gaps in information aggravate the uncertainty about cost pattern and return on investment, choice of technology, competitiveness, consumer preferences, market intelligence, business environment, and so on, for SSIs.

Knowledge management is now a critical input in value creation, risk management and supply chain management. These new and complex uncertainties, along with irreversible nature of capital expenditure, reduce the demand for term credit.

Decadence of credit culture and a weak contract enforcement system have increased the uncertainty and risk of default/delays by debtors. This has induced strong preference for cash sales to credit sales, in trade and industry.

Inordinately high cash discount system in trade and industry incentivise the cash-and-carry system and make business based on credit purchases relatively less competitive. These reduce the demand for credit.

Trade credit creates multiple credits, as its chain runs from raw material suppliers to manufacturers, dealers, wholesalers and retailers. Decline in trade credit reduces credit by multiples. Demand for bank credit is affected as it ultimately passes through trade credit chain.

In a paper on the relationship between trade credit and investment in Mexico, Prof Miguel Messmacher concludes that there is a positive and significant relationship between availability of trade credit to a firm and its fixed investments, as trade credit: i) allows a firm to use other funds for investment, ii) helps in better cash, inventories and production management, thereby improving a firm's operational efficiency; and iii) reduces the need for keeping large amount of assets in liquid form.

Non-bank credit channels provide confidence and comfort as a standby source of credit and as a lifeline to the firms under temporary distress as well as meeting their day-to-day liquidity requirements. These have been systemically undermined by credibility concerns regarding debtors and declining integrity of non-bank credit channels. In such a situation, the perceived need to hold larger liquidity affects capital expenditure by businesses.

Today credit carries higher risk of bad debt, delays, uncertainty and even possibilities of spoiling business relations. Integrity of credit culture needs to be strengthened in trade and industry to enhance confidence, efficiency and effectiveness of credit channels.

To restore trust and confidence in non-bank credit channels, besides strengthening creditors' rights, trade and industry may also need to form/strengthen self-regulatory organisations, dispute settlement mechanisms, and so on, to maintain and enforce credit discipline.

Self-regulation and self-discipline can be more efficient, faster and effective compared to state-sponsored set-ups or legal remedies, as business dealings are mostly based on tacit understanding and trust.

There is need for facilitating access and integration of SSIs engaged in tradables with global supply chains. This requires identification of gaps in current information/knowledge management, its availability, content management, pattern of accessibility, location, and so on.

There is a need for building up a knowledge platform for SSIs with multi-sector partnership and strategic knowledge alliances with MNCs, business associates, industry experts, industry associations, SSI financing and development institutions, management schools and R&D labs to take advantage of the opportunities opened up by economic globalisation.

(The author is DGM, SIDBI. The views are personal.)