CREDIT DELIVERY TO MSEs

7th January, 2013

By K. Parthasarathy

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Exordium:

The old SSI and the new MSE (Micro and Small Enterprise) have to be exclusively studied in every aspect of their sustenance by segregating them from the common group of MSME, christened newly under the MSMED Act of 2006.

The clubbing of micro and small with Medium itself is an unworkable preposition like conducting a tortoise-hare race. The need for considering MSEs separately for certain vulnerable concepts like Delayed payment Act, Govt. purchase Scheme etc., has been acceded to by the Govt., out of pressure mounted from SSI Associations.

Even under the MSE nomenclature, there is still an element of injustice to the real micro and small manufacturing units, since the concept of “service” brought into the fold through the new nomenclature viz., ‘Enterprise”, has overtaken the hard working manufacturers by gobbling up the target stipulations meted out to contributory institutions like bank.

Thus, when we have to discuss the particular issue of credit delivery to the MSE, we are obliged to clarify on thes above aspects and demand an exclusive dispensation for the Micro and Small manufacturing units.

Major issues:

In respect of credit to the small industry, there are certain chronic issues which remain unsolved over a long period of time: The nothing-new items are:

In respect of credit dispensation several committees have been constituted in the past. It will be worthwhile to study the salient features of these reports before deciding on the needs of MSEs as on date.

The legend of studies:

P.R. Nayak Committee, 1991

This committee report is by far the long standing recommendatory provision, quite relevant even as on date. Some of the out-standing measures stipulated under this report are:

The first two recommendations specifically quantifies the bank limits and the margin participation of the unit.

This is not being followed by the banks and the margin demand starts from 25% and goes upto even 50%. This is the primary reason for SSIs being dispensed with inadequate finance.

Dr. Abid Hussain Expert Committee, 1995

The salient features of this committee’s report in respect of restructuring SSI Credit needs are:

S.L.Kapur High level Committee, 1998

Kapur Committee has made 126 recommendations out of which RBI has accepted 40 recommendations for implementation. Some of the important ones are:

Dr. S.P. Gupta Study Group, 1999

The salient features of this committee’s report:

Dr. A.S. Ganguly Working Group, 2003

The salient features of this committee’s report:

P.M’s Task Force 2010

The sub Group on Credit in the above task force have come up with 22 recommendations to be implemented by Ministry of MSME, Dept. of Financial Services, RBI and Banks, with time frame of 1 to 3 months. Some pertinent advocacies:

M.V. Nair Committee 2011

This committee constituted by RBI studied priority sector lending and formulated certain recommendations some of which pertaining to MSE are as under:

Now, the Practical Approach:

Though the 2006 Act has brought Micro and small sectors into bracket of Medium units, it is not a welcome measure for the first two categories of vulnerable and weaker constitution. The torch bearer Associations of these two sectors have always been clamouring for separate and exclusive benefit considerations in any policy initiative devised for MSME as a whole. Specifically, in the matter of bank credit certain clear advantages have to be built into the system for serving the weaker sections of the industrial society effectively.

Here are some musings:

Rationalised limit formula: The present day yard-stick for SSI finance is the Nayak Committee norm of granting bank credit of a minimum 20% of the annual turnover. This formula was worked out assuming some standard factors like one-month stock and two months post sale outstandings.

However, the real situation may vary from unit to unit specifically with the change in the credit being given by the small unit to its customer. So a more rational and scientific formula will be to fix the bank Working Capital Limit as: 0.08 S + 0.06 q S where ‘S’ is the annual turn-over and ‘q’ is the months of credit given on sales. Here, the first block is Stock limit and the second block is the Bill limit.

Further the Working capital loans for Micro Enterprises shall be in the form of single overdraft limit to cover stocks and receivables, with a flat maximum margin of 20%.

Fair interest rate:

The ruling interest rate directed by the Govt for the agriculture and small scale is PLR plus or minus 2%. Invariably, the banks charge truthfully PLR plus 2 to the small man.

Here again, the original stipulation of PLR was the PLR of State Bank of India, which would be the lowest. Later, it was taken as PLR of individual banks and the hapless SSI has to invariably pay 1 or 2% more in comparison to SBI rate of PLR. Now, the concept is Base Rate system. It is therefore the need of the hour that the cost of credit is made more rational, especially for the Micro sector units which form the near-90% block of the industry sector.

The following slabs are ergo suggested to do justice to the cause of the Micro units in the matter working capital finance:

Further, GOI should come out early with the interest subvention scheme for the Micro (mfg) units which it has been mulling over for quite some years now.

Credit Guarantee Cover: Though this scheme helped Banks to be more willing to advance small units, there is no element of extending it as a matter of routine to smaller people of the sector on the pretext that the units do not opt for the same by themselves. It is therefore a need for making it mandatory at least to the lowest category of small units viz., Micro Sector. And, since it is primarily to cover the risk of Bankers as a sort of insurance, the premium so to say in the form of one-time fee and annual fee, have to be fully borne by the beneficiary viz., the Bankers.

Service Sector Concept: As already mentioned in the introductory para, the inclusion of service concept on account of changing the earlier terminology of industries into Enterprises, the very priority support measures aimed to help the vulnerable sector of SSI, have become largely diluted. For example, the mandate of the Govt., to double the bank credit for SSI in 5 years with year-on-year increment of 20%, got diluted at the first instance on account of change in the beneficiary nomenclature from SSI to SME and at the second instance to classifying several trading activities under service activity. On account of this preposition, the bankers are able to show 100% increment in their credit within a year itself as against the mandated 20%. We have therefore started demanding in RBI’s Empowered Committee meetings that the 20% year-on-year increment should be shown in every sub-sect category under SME including the manufacturing enterprises.

Priority Sector Lending: Banks have to invariably follow some statutory pre-emptions like CRR, SLR under monetary policy. The third pre-emption, in the form of directed credit, is the priority sector lending. The considerations governing PSL are partly economic and partly developmental.

As on date PSL encompasses: Agriculture (Direct & Indirect), MSE (Direct & Indirect), Micro Credit, Advances to SC/ST, Education, Housing, Weaker Sections and Export Credit. Some of the targets break-ups are: Agriculture 18% of ANBC, MSE 40%, Weaker sections 10%

Under the 40% target for MNSE, the sub-targets are: Micro (mfg) & (service): 40% for units upto 5 lakh investment, 20% for 5 to 25 lakhs investment

The Narasimham Committee of 1991 on PSL, suggested phasing out of directed credit, permitting ultimately only 10% of the aggregate credit to really needy and poor. This was not accepted by RBI.

The recent Nair Committee permitted the existing categories but fixed the sub-target for micro enterprises within MSE sector, at 7 per cent of ANBC.

We wish that there is no further dilution of the targets for MSE under PSL. Only thing is that under the sub-targets for Micro Enterprises, the allocation for Micro manufacturing sector should be specific and separate.

Epilogue:

The need for caring for the Micro sector, especially the manufacturing group, has been stressed at every aspect of the credit policy measures formulated by the Govt. The credit dispensation apart, there is one other consideration that is vital in sustaining the sector is to provide adequate protection which covers various forms of dispensation like Equity Capital, Venture Capital, Market support through Govt patronage, Guarantee cover for receivable bills including Factoring without recourse, timely Sickness Rehabilitation with built-in Exit scheme and last but not the least Business Risk coverage for the entrepreneur. Probably a separate enactment for the Micro sector units encompassing all these vital aspects would be need of the day.