Brand India — the small picture

The MSME sector is critical for India’s economy. Their share in GDP at around 8 per cent currently can grow to 15 per cent by 2020 according to a KPMG-CII study. Hopes are centred around the prospects of double digit growth in a few manufacturing sectors and FDI interventions in the defence, pharma and infrastructure sectors. Not so encouraging, however, is the decline in credit growth in manufacturing, from 13.7 per cent a year ago to 7.3 per cent in December 2014.

Although some confidence-building measures are in place, the government needs to do at least 10 things. It has infused some confidence building measures, like a few start-up funds for SC entrepreneurs, and revisiting the definition of the MSMEs and credit policies. But an action plan is called for..

1. Segregate the micro and small from medium enterprises by redefining the sector so that the incentive structure is geared to promote entrepreneurship for micro and small startups.Three distinct categories in the MSME sector deserve out-of-the-box solutions.

Micro enterprise sector : largely unorganised, consisting of artisans, village craftspersons, micro entrepreneurs and small service operators function from cultural domains and inherited skills and locally available raw materials.

Manufacturing sector in the micro segment : carpenters, cobblers, blacksmiths, goldsmiths and coppersmiths in villages. Several of these two categories are in the proven inefficient KVIC umbrella. KVIC as intermediary financier is the biggest single NPA in the MSE lending portfolio of PSBs.

Manufacturing SMEs : These are the core small and medium manufacturing enterprises requiring structured finance products and export finance with banks investing time in due diligence and careful supervision. Both, enterprise specific and entrepreneur specific credit support is required.

2. Startup MSMEs find it almost impossible to invest in land because of prohibitive cost. States building rural industrial townships with safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for workers, schools, crèches, playgrounds and cultural spaces would boost this sector.

Industrial work space should be made available on leasehold basis for 15-20 years with permission to mortgage rights in favour of lending institutions. Existing urban industrial estates currently existing should be upscaled and modified to provide all the logistics under the PPP mode.

3. District Industries Centres for MSEs as a delivery window is inefficient in most States. Restructuring DICs and skill-building are crucial.

4. Credit and guarantee mechanisms should be made mandatory for certain thresholds for each subsector in manufacturing micro and small enterprises. Any collateral obtained beyond the rule should be declared ineligible for lending institutions to proceed against in the event of failure of the unit.

The valuation of mortgaged securities should be done annually by the banker to pare with the outstanding credit. Trade receivables and credit exchange recently set up by the Reserve Bank of India should be monitored.

5. All the MSEs should be provided credit at no more than 9 per cent for meeting working capital requirements. It should be cash flow based lending. Work order should be the basis of lending.

6. Incipient failures should be treated expeditiously by lending institutions. If the borrower does not cooperate, it should be treated as wilful default.

7. As the owner of workspaces in industrial estates, the government should be able to re-allocate the space to another entrepreneur once the existing entrepreneur is given the exit chit. Such allocation should be unrelated to the liabilities of the existing failed entrepreneurs.

8. Sidbi should prove its supremacy over the other primary lending institutions and should be seen as a guide and benefactor to MSEs and small banks. It should also be restructured to cater to sophisticated medium enterprises and mid-corporate enterprises. Its current micro finance lending window should be operated through a separate subsidiary.

9. The RBI should reorder its priority sector categorisation and modify its MIS for effective monitoring of the growth of the MSE sector.

10. The Bankruptcy Law/Exit Law has to be enacted immediately.

Humanising the lending process is critical to the growth of MSMEs.

The writer is a senior fellow at the Institute of Small Enterprise Development, Kochi

COMMENT NOW