The government recently released the results of a national innovation survey based on a sample of 9001 firms, mainly micro, small and medium enterprises (MSMEs) from different sectors spread across 26 States and five Union Territories.
An important report, it helps understand innovation, benchmark innovation potential, and factors affecting it. MSMEs are generally low or medium technology industries. Accordingly, innovative activities are also low which may not augur well if ‘Make in India’ has to complete globally. The country has nearly 30 million MSMEs employing nearly 60 million people, accounting for 45 per cent of manufacturing output, 40 per cent of export and 8 per cent of the GDP.
Funds matterThe barriers to innovation are related to cost, knowledge infrastructure, market, policy constraints or uncertainty in demand for goods and services. The survey indicates that the most significant factor was availability of finance. Most firms were shown to be dependent on domestic financial institutions and internal resources.
The importance of finance for MSMEs helps extend and accelerate the growth frontier as well as deepen financial inclusion. The government, the Small Industries Development Bank of India (SIDBI) and the National Bank for Agricultural and Rural Development (Nabard) have been initiating a number of measures to ensure flow of credit and resources to MSMEs, such as MSME stock exchange, venture capital, credit guarantee scheme, and factoring. However, 93 per cent of the MSMEs remain self-financed while 5 per cent are funded by banks and 2 per cent by non-institutional sources.
Commercial banks have been reluctant financers for various reasons, mainly because of the issue of recovery of loans due to lack of identification documents and standardised recovery procedures. Assessing the commercial viability of products is difficult because of the heterogeneity of the products and uncertainty in the markets from where MSMEs source inputs or where final outputs are placed for sale. Fear of NPAs causes commercial banks to be reluctant about investing in MSMEs, without proper security.
A possible remedyCommercial banks could explore what has been successfully tried by microfinance institutions — the joint liability group (JLG). A JLG is a small and informal group generally consisting of four to 10 members. The members come together to avail bank loans either singly or together against mutual guarantee. For availing bank loans, the basic requirement is that the members form a group based on trust. The loan amount availed either individually or collectively is considered as micro credit which is treated as priority sector advance.
Having recorded excellent recovery, the JLG mechanism can be extended to MSMEs. The limit (₹50,000 in the case of microfinance lending) can be enhanced depending on the product and industrial cluster and amount considered under priority sector.
The other mechanism could be Self Help Groups (SHGs), which is a small and formal/informal group formed voluntarily for a specific purpose. The SHG works towards meeting credit needs of the poor through an informal credit system by making it more flexible, sensitive and responsive, and by taking technical and administrative assistance from the formal credit system.
The advantage of financing through SHGs involves reduction in transaction costs for both lenders and borrowers. In the case of MSMEs, the small units that produce inputs for the principal or larger industrial firm (LIF) can form an SHG. The LIF can stand guarantee for the respective MSME and charge a guarantee fee.
During a distress period, the LIF could directly pay the lender, and later recover the amount from the MSME or adjust the amount against supply of goods. It is interesting to note that MSMEs have generally complained about delayed payments by their principal purchasers, both in the public and private sector. The SHG approach will help assign responsibility on the principal purchaser. In India, MSMEs can be the harbingers of growth and employment, given that about 15 million workers are expected to join the workforce annually over the next 30 years.
The writer is the RBI chair professor of economics, IIM Bangalore