The myopic proposal
to create a dedicated bank for MFIs does not address the systemic problems in
the banking sector that
work against the interests of small enterprises. By
IN 2010, a report prepared by the then
Prime Minister Manmohan Singh’s task force on micro, small and medium enterprises (MSMEs) flagged a number of
impediments to the growth of these industries. The Narendra Modi-led National Democratic Alliance (NDA) government’s
Budget this year has envisaged the creation of a dedicated bank for refinancing microfinance institutions (MFI) that
will lend money to these industries. However, the government is yet to take
concrete measures to resolve a number of concerns
that have continued to thwart the growth of small and medium enterprises (SMEs) over the years.
The large number of SMEs in India (about
5.77 crore, according to a National Sample Survey Office survey of 2013), which generate considerable job opportunities,
continue to find it difficult to gain access to finance. A number of
recommendations of the 2010 report are yet to be
implemented. Also, the model of the proposed bank based on MFIs has come under
scrutiny, given the record of these institutions
in charging exorbitant interest rates and employing coercive tactics of recovery. According to the announcement in Union
Budget 2015, the Micro Units Development and Refinance Agency (MUDRA) Bank is expected to partner with coordinators
at the State level to provide finance to SMEs. A corpus of Rs.20,000 crore has
been allocated to the bank. The Ministry of
Finance said in an official statement on March 1 that the bank would lay down guidelines for micro and small
enterprise financing; business, registration, regulation and accreditation of
MFI entities; promoting right technology solutions;
and formulating a credit guarantee scheme for loans given out to micro
enterprises.
The government has also announced that
loans to SMEs by public sector banks are to be brought under priority sector lending. A separate sub-limit of 7.5 per cent has
been created within the priority sector lending norms for micro enterprises.
The Union Budget further proposed the setting
up of a Trade Receivables Discounting System (TreDs), an electronic platform
that will facilitate financing of trade
receivables from corporates and other buyers through multiple financiers.
Concerns of SMEs
The 2010 report had pointed out several institutional
problems. It observed that the high cost of credit, requirements of collateral, limited access to equity
capital, lack of access to global markets, and the absence of a mechanism for
the revival of sick enterprises were some of the major
concerns of SMEs. The report had also recommended a series
of measures to address these concerns. The task force had recommended a target of 20 per cent year-on-year growth for
micro and small enterprises lending by commercial banks. It had also advocated
a public procurement policy for MSMEs that
would mandate a goal for government departments and public sector undertakings (PSUs) to reach a target of
at least 20 per cent of their annual purchases from SMEs and report the same in their annual reports.
It had proposed that the government
should earmark an additional public spending of Rs.5,000-5,500 crore over the
next three to five years to deal with
deficiencies in the existing infrastructure and institutional set-up of SMEs. Five years after the report was published,
many of these recommendations remain on paper. The problems of SMEs getting easy access to credit from public sector
banks remain. The myopic proposal of creating a dedicated bank for MFIs does
not address the systemic problems in the
banking sector that work against the interests of small enterprises. Speaking to Frontline, Jayant
Davar, chairman of the northern regional committee of MSMEs of the Confederation of Indian Industry (CII), said: “The fundamental
problem in the approach to the issue of making available credit for SMEs is
that there is no concept of development banking
with the intent of nation building and a separate corpus of funds is still not
set aside for the banks to be able to give out as
loans to these industries. The banks are still averse to taking on the risk of
giving out loans to SMEs. Over the last three
months, the CII has been running a credit facilitation centre which brings
together banks, MSMEs and credit-rating agencies across
the country to make credit easily available to SMEs. About Rs.100 crore has
been disbursed to SMEs across the country as
a result of this initiative. There is an attempt to bring the banks on board
through seminars, road shows and interactive
sessions. This initiative has led to some positive results. But a lot more
remains to be
done by the government to increase these
industries’ access to banks.”
Another informed industry source, who
has worked closely with a number of SMEs, pointed out some of the common problems that persisted. “The creation
of a Credit Guarantee Fund Trust by the Ministry of MSME and the Small
Industries Development Bank of India [SIDBI] last
year was meant to facilitate the flow of credit to the sector without the need
for collateral or third-party guarantees.
This scheme was meant to provide a cover for a credit facility up to Rs.1 crore
for an annual service charge and a guarantee
fee to be paid by the borrower. However, across the northern States, banks
continue to insist on a collateral for loans
below Rs.1 crore. The insistence on collateral creates obstacles for the small
players, who have no financial security. It also
creates impediments in the process of expansion of business for small players
who cannot avail themselves of a second loan.
Another issue that a lot of these units face is the delay in payment by big
corporations by about 30 to 60 days and sometimes more,
which affects their working capital cycle. Also, the debt to equity ratio [a
measure of a company’s financial leverage, which
shows what portion of debt and equity the company is using to finance its assets] of most SMEs hovers around 4:1. In the
2014-15 Union Budget, Finance Minister Arun Jaitley had announced the setting
up of a Rs.10,000 crore equity fund to
boost capital flow to SMEs. This fund is still lying unutilised. The
SME-specific branches of banks are also not proactive in
disbursing loans to the SMEs,” the source said.
It is learnt that before the Union
Budget was finalised this year, the CII had submitted a set of recommendations
to the government to address the concerns of
SMEs. The industry body had recommended, among other things, compulsory procurement of materials by public
sector units from SMEs, the setting up of common research and development
facilitation centres by the government, and statutory
guidelines to stipulate penalties or interest for big corporations which delay payments to SMEs. These recommendations
were not reflected in the Union Budget.
Also, it is important to note that some
of the recommendations of the 2010 report on SMEs are yet to translate into
concrete action. The most important among these
are the proposed public procurement policy mandated for PSUs to buy materials from SMEs and the mandated 20 per cent
year-on-year growth in lending to SMEs by commercial banks.
Problems with the MFI
model
The proposal to run the MUDRA Bank on
the MFI model has also come in for criticism. Sudha Sundararaman, national
vice president of the All India Democratic Women’s
Association, highlighted some of the existing problems with the MFI model of financial inclusion. “The proposal to
route the funding for the new bank through MFIs is a move towards increasing
the profits of these institutions and
encouraging the private sector instead of strengthening public sector banks.
Our women’s groups working in the States of Odisha,
Karnataka and Andhra Pradesh continue to report large numbers of women falling into the debt trap because of the
exorbitant interest charged by MFIs. MFIs continue to function largely as
exploitative institutions and not as arbiters of
financial inclusion. About three months ago, women in Odisha united in an
effort to refuse to pay the exorbitant interest rates
charged by MFIs. There is an ongoing movement in Andhra Pradesh by women to strengthen the linkages between banks
and self-help groups [SHGs] and avoid dependence on MFIs,” she said. “The
government has to reach out to SMEs with
substantial allocation of funds. These are labour-intensive industries which generate considerable employment. They
continue to have problems with credit availability. In a situation where the government clearly sides with large
corporations, small industries are facing challenges of survival.”
(Published in Frontline.in)
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