The Hindu Business Line : Credit flow to the MSE sector needs to be scaled up

The provisioning requirement of 0.25 per cent even for standard assets of micro and small enterprises has to be scrapped immediately, if only as a signal to banks to lend to this sector.

Mr DE Ramakrishnan, President, IFRASTE

M. Ramesh

Macro figures mask micro infirmities. On the face of it, the flow of institutional credit to MSEs (micro and small enterprises) is fine, having grown 32 per cent in 2007-08 to touch Rs 1.48 lakh crore as at March 31, 2008.

There is legislative support for the development of MSEs —the Micro Small and Medium Enterprises Development Act, 2006. Support services such as credit rating agencies exclusive to MSEs have been set up, there is a fund to guarantee banks the loans given to MSEs, there is a scheme that will give capital subsidy….the list goes on. So, is everything hunky-dory?

Far from it. According to Mr DE Ramakrishnan, President, Industrial and Financial Reconstruction Association for Small and Tiny Enterprises (IFRASTE), all this is claptrap. All of these help only a tiny fraction of the universe of ‘small and medium enterprises’.

For the ‘micro’ and ‘small’ portion of the ‘MSE’ it is silent suffering. Mr Ramakrishnan, who is also a member of the National Board for Micro, Small and Medium Enterprises (NBMSME) of Government of India, explains to Business Line why he thinks so.

Excerpts from the interview:

The MSMED Act has been in place for the last two years. What has the Act done to the MSEs?

Practically nothing that has improved the competitiveness of the MSEs. The purchase and price preference policy is still “under examination”.

An ‘exit policy’, mandated under the Act to be done within two years, has not even been kicked off for discussion, even though two full years have passed since the Act came into force.

Delayed payments continue to dog MSEs…

Yes. Very badly. The extant RBI guideline of 2000 has been a paper tiger and a toothless wonder. I can say without fear of contradiction that not a single account has been segregated by the banks fixing a separate sub-limit for payment to MSEs out of funds sanctioned to large units of more than Rs 10 crore (as required by the RBI guideline).

To talk of regulatory oversight by the RBI, without there being any penal action other than sabre rattling, is saddening.

Credit flows to the MSE sector, which grew 32 per cent in 2007-08, has been quite good.

The growth of credit at 32.2 per cent looks impressive, but viewed as a percentage of net bank credit and as a percentage of the value of production of the MSE sector (Rs 5.82 lakh crore last year), this needs to be scaled up.

Further, the smaller units are not getting adequate share of the credit flows. Micro enterprises with investment in plant and machinery of less than Rs 5 lakh account for 97.9 per cent of micro and small enterprises.

For instance, in 2007-08 only 23 per cent of the Rs 37,924 crore credit went to them, though the RBI mandates 40 per cent. The other 77 per cent of bank credit went to 2.1 per cent of the enterprises.

But smaller the MSE, the bigger the risk, say banks.

Do not forget there is an element of risk fundamentally in lending and also do not forget that the dharma of a banker is to lend. Especially so for public sector banks which are able to access cheap public deposits because they are owned by the Government. The problem is bigger than lending or risks.

Small industry associations had last year expressed some views against the overkill in application of the SARFAESI Act against the small units and had asked for a set of changes, such as raising the threshold limit for the applicability of the Act from Rs 1 lakh (of overdue amount) to Rs 25 lakh and raising the notice period from 60 days to six months. Update us on this?

There has been not even an acknowledgment, leave alone a reply, from the Government.

When the SARFAESI Bill was introduced in Parliament in November 2002, the then Finance Minister noted that 49 per cent of the NPAs (non-performing assets) were of loans between Rs 1 crore and Rs 50 crore.

He made a promise on the floor of the House that the Act was aimed at this block. But see the ads in papers today.

Most of them pertain to loans of just a few lakhs. The SARFAESI Act is now being perversely targeted against the MSEs singularly and selectively by the banks. Incidentally, a Lenders’ Liability Act was also promised — it has not yet happened.

What are your expectations of the Government now?

First, involve us in consultations. The Government recently invited industry associations such as Assocham and CII, which cater only to large scale industries, to discus the economic and liquidity concerns, but there was no representation from the MSEs.

The Prime Minister should have chosen to interact with representatives on the NBMSME board at least. Apart from consultation…

Yes. We want the NPA norms to be increased to ‘180 days’ from the present ‘90 days’.

The provisioning requirement of 0.25 per cent even for standard assets of MSEs has to be scrapped immediately, if only as a signal to banks to lend to MSEs.

The RBI has brought down provisioning norms for standards assets of some other categories of loans from 2 per cent to 0.40 per cent. This was because the 2 per cent norm was during a phase of runaway growth in credit, which is not the case now.

The same logic should be extended for standard MSE loans also.

And then….

The outstanding loans of the MSEs must be frozen at, say, September 2008 levels and funded as a term loan with a long repayment period preferably for 24 months with a soft rate of interest.

New lines of credit at, say, 70-75 per cent of the old outstanding loans, again on soft terms of interest at, say, 8 per cent should be extended to tide over any liquidity problem of the MSEs, without additional margins or collateral demanded of the MSEs.

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