The Hindu Business Line : All-encompassing SME umbrella — Ensure proper cover for the tiny sector

THE continued neglect of the manufacturing and agricultural sectors, in general, and the neglect of the Small Scale Industries SSIs and the tiny sector, in particular, has been a cause for grave concern, affecting not only the livelihood of millions of small entrepreneurs and artisans, but also the nation's economy.

The contribution of the manufacturing sector to India's GDP is 20 per cent compared to 35 per-45 per cent in China, Korea and Taiwan, and the Asean. The Prime Minister, Dr Manmohan Singh, has said: "The essence of the National Common Minimum Programme is the recognition that policies that are aimed at promoting economic growth must also advance the cause of distributive justice and create new employment opportunities. We want India to shine, but India must shine for all."

Various events in the recent past have left SSIs with the impression that step-motherly treatment has been meted out to them. Not the least of which is the casual and apologetic mention of SSIs in the UPA Government's first anniversary brochure, which reads: Small-scale industries policy further liberalised with the de-notification of more industries from the SSI list. The Small and Medium Enterprises Development Bill, 2005 introduced in Parliament, will improve the competitiveness of SMEs.

The Bill is a watered-down version of the original draft Bill proposed by the Administrative Staff College of India, Hyderabad, which was formulated after consultations with all the stake-holders concerned.

The Bill talks of a new nomenclature called SMEs. To talk of an all-encompassing umbrella including the existing SSIs and tiny units along with medium enterprises (MEs), to be called SMEs, will sound the death knell of the small and tiny sectors.

Coupled with this development, an internal working group of the Reserve Bank of India has circulated a draft report on financing to this new amalgam of SMEs. It has been proposed that the investment limit for the SSIs be increased from the present Rs 1crore to Rs 5 crore. An investment limit of Rs 5-10 crore has been proposed for MEs.

The draft report talks, among other things, of a Credit Debt Restructuring (CDR)-type mechanism for the MEs, similar to the one in large industries.

In the same breath, it talks of withdrawing existing circulars for the rehabilitation of sick units, rehabilitation and revival of the SSIs and tiny enterprises, while expressing hope that the boards of banks formulate more benign policies than the existing RBI circulars, their dismal performance so far on this score notwithstanding.

True, SSIs and the tiny sector need to graduate to the medium sector, given the dynamics and mechanics of today's globalised and liberalised scenario. However, such graduation will have to be a natural progression.

The third All India Census (2001-2002) of SSIs and Tiny Units, reveals that registered SSIs constitute less than 15 per cent of the total of this generic grouping, which includes artisans, Khadi and Village Industries units and craftsmen. Among these SSIs, 90 per cent are proprietary in nature, 7 per cent are partnership firms and 3 per cent private limited companies.

About 99 per cent of SSI units are, in fact, very tiny units with an original investment in plant and machinery of less than Rs 2 lakh, employing less than six persons and with an output of less than Rs 10 lakh.

The priority-sector lending mandate, as originally envisaged, was only for agriculture and SSIs. On the one hand, banks did not achieve targets in directly lending under this mandate.

On the other, bringing more sectors under the priority sector lending category, shrank the latter's limit, which made direct lending to SSIs a mere ritual.

A disturbing trend over the last decade has been the steady decline in the percentage of total bank credit to the SSIs, as also the decline in absolute terms of the number of units so financed.

Credit to SSIs, which was about 17 per cent of bank financing, covering about 32.75 lakh units in the early 1990s, irreversibly declined during the last decade to 11.1 per cent of bank finance, to about 17 lakh units, as of March 31, 2004.

Ironically, though the number of units financed and the percentage of finance to these units have come down drastically, the amount financed individually to such units has increased substantially.

Clubbing the small and tiny enterprises with the medium enterprises under the SME umbrella might remove the former from the ambit of crucial institutional financing.

It would, therefore, be wishful thinking to assume that SSIs and tiny units would graduate to MEs by merely bringing them under the umbrella term of SME. However, it is heartening to know that the Finance Minister, in a recent meeting with bankers, said that the next thrust area of increased credit flow would be to the SMEs.

The flow of credit to the SSI and tiny sectors is expected to be doubled in the next three years by formulating a Special Credit Plan (SCP) along the lines of the Special Agricultural Credit Plans (SACP), which increased lending by 44 per cent in just one year, from Rs 84,000 crore to Rs 1,15,242 crore for the year ending March 31, 2005.

A separate target of 12 per cent solely for SSIs and the tiny sector from out of the priority-sector lending target should be fixed for effective funding of this sector by banks.

The policy on enhanced credit flow should have three layers of interest rate for financing SSIs and the tiny sector: Advances of up to Rs 10 lakh should be at the rate of PLR minus 2 per cent. Advances between Rs 10 lakh and Rs 25 lakh should be at PLR. For advances above Rs 25 lakh, the interest rate should not exceed PLR + 2 per cent.

The second major reason, according to the all-India census, for sickness among SSIs is shortage of working capital. As per RBI guidelines, branch managers are not authorised to address revival and rehabilitation measures in respect of units identified as sick units. NPA (non-performing asset) monitoring cells should be set up, at the branch level, with representatives drawn from various stake-holders.

A financial package, similar to the one proposed in the Budget for the sugar industry, should be made available to the small and tiny enterprises also, to help them tide over recession and the various effects of globalisation.

A moratorium of two years, on both principal and interest, and a schedule of payment according to the commercial viability of each unit, at an interest rate of 2 per cent below the bank rate, should be made applicable to outstanding loans as on the December 31, 2004, with an option to renegotiate the past high interest rates.

(The author is President, National Confederation of Small Industry.)

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