The Hindu Business Line : `It is financial exclusion of SSIs'

"The share of credit to SSIs as a percentage of net bank credit has come down from 17.5 per cent to a pathetic 8.1 per cent today, though credit to SSIs has grown in absolute terms." MR DE. RAMAKRISHNAN, PRESIDENT, INDUSTRIAL AND FINANCIAL RECONSTRUCTION ASSOCIATION FOR SMALL AND TINY ENTERPRISES

In 2005-06, credit disbursements to the small-scale sector grew 21.6 per cent and amounted to Rs 15,651 crore. One would have thought that this would gladden the heart of any champion of small-scale industry, but apparently some are not impressed. Mr DE. Ramakrishnan is one of them. The President of Industrial and Financial Reconstruction Association for Small and Tiny Enterprises (INFRASTE) and of National Confederation of Small Industry (NACOSI) feels that the figures "conceal more than they reveal". In an interview to Business Line, he explains why he feels that the Small-Scale Industries sector continues to be a victim of financial exclusion.

Excerpts from the interview:

You have said that flow of credit to the SSI sector is not adequate. But the disbursement figures for 2005-06 show otherwise.

Yes. Disbursements to SSI sector for fiscal 2005-06 grew 21.6 per cent over the previous year, to Rs 15,651 crore. The outstanding credit for fiscal 2005-06 to SSIs stands at around Rs 90,250 crore. But these figures conceal more than they reveal.

Why?

Because, as a percentage of units covered by institutional credit, we are talking of less than 15 per cent coverage. This has been commented upon as early as in 1997 by the S. L. Kapur Committee, which went into the whole gamut of SSI financing.

But surely things have improved since...

They have not. The All India Census 2001-02 talks of 123 lakh units, of which 18 lakh were registered. As of end 2006, total number of accounts financed by the commercial banks was 17.71 lakh units, after addition of 64,000 in 2005-06. But even this is far lower than the peak of 32.74 lakh units a decade back.

So you conclude that the flow of credit to SSI sector is inadequate...

There are other parameters supporting such a conclusion. For instance, the share of credit to SSIs as a percentage of net bank credit has come down from 17.5 per cent during the same period as above to a pathetic 8.1 per cent today, although credit to SSIs has grown in absolute terms.

What does it mean? It means banks are comfortable lending to only the larger of the small-scale units.

Banks have their justifiable risk perceptions.

Then how come all of a sudden in 2005-06, there was a sudden surge of 21 per cent in SSI funding. For the first time in history, credit disbursements to SSIs touched fivedigits (at Rs 15,651 crore) in a single year. All these years, the decline in funding had been attributed to three Cs — CBI, CVC and CAG — and the reluctance of the branch manager to finance small industry.

Risk in SSI lending was primarily caused by heavy asset-oriented, collateralised lending coupled with inadequate and delayed release of funds. Banks also used to look at lending to agriculture sector also as risky.

Then the Finance Minister says that credit should be doubled in five years, and, Hey Presto! It got doubled in two-and-a-half years. Then again the Minister says that credit to SSI sector should grow, and it increased by 21 per cent in the very first year after he said it. This only shows that all these years bankers were happy doing lazy/narrow banking, with income from treasury operations shoring up their bottom-line.

But nevertheless credit to SSI sector is growing, is it not?

No. India's manufacturing output is split between non-SSI and SSI sectors in the ratio of 60: 40. For 60 per cent of production, the large companies are getting three-five times the credit that SSI sector gets. Outstanding credit to SSI sector is about Rs 90,250 crore and 17.71 lakh units are financed. So, we are talking about Rs 5 lakh per unit. You want me to scale up to face global competition, how do you expect me to do it with Rs 5 lakh of credit?

But Rs 5 lakh is only the average, and perhaps the deserving units are getting enough credit.

Very few units may be getting adequate institutional funding. You are talking of Rs 4.25 lakh crore of production by the SSI sector and lending of Rs 15,651 crore, you are talking about credit that amounts to a measly 3.5 per cent of production value. And, as a percentage of priority sector too, the share of SSIs is pretty small. This is because so many items have been included under the priority sector to enable banks to meet their targets. Today, even housing loans up to Rs 15 lakhs get counted as `priority sector lending'.

What is wrong if government considers housing to be an important component of economic development?

Housing is certainly important, but it gets institutional funding anyway, whether or not it comes under the `priority sector'. When banks are anyway lending to housing, why bring it under priority sector lending?

But is it not true that things are changing, at least during the last one year?

Too little, too late. The recently-enacted MSMED Act, 2006 speaks of the need to enhance competitiveness of micro and small enterprises. These units can never be competitive with such meagre flow of credit.

How can you argue against 21.6 per cent growth?

I'm not arguing against 21.6 per cent growth. I want 21 per cent to be made 42 per cent. I'm only saying that the financial exclusion so far has never been viewed in the context of enhancing competitiveness, but only in terms of mere platitudes in the fulfilling of priority sector lending targets. About 98 per cent of the units surveyed by the last Census were found to have original investment in plant and machinery of less than Rs 2 lakh, employing fewer than six persons and with an output of less than Rs 10 lakh. The units should be our target audience.

Institutional credit is not flowing to the needy micro enterprises even after all these years of directed lending and various affirmative actions take by the various governments of the day and the Reserve Bank of India.

The RBI has mandated that 7.2 per cent of net bank credit should go to small units with investments in plant and machinery under Rs 25 lakh. Never in history has this been achieved by banks. If this is not financial exclusion, then what is?