Financing SMEs

The flow of bank credit to small scale industries, never commensurate with their requirements, has been even lower than usual in recent years.

The growth in credit to the SSI sector was a mere 5 per cent in 2003-04, compared to 11.1 per cent for medium and large industry, 15.7 per cent for agriculture and 25 per cent for housing loans. Nor was 2003-04 exceptional""during 2002-03 and 2001-02, lending to small scale industry grew by 3.9 per cent and 2.2 per cent, respectively.

It's true, therefore, that SSIs have received stepmotherly treatment from banks, especially when one considers that loans to SSIs grew at around 15-17.5 per cent in the mid-nineties.

However, with non-performing assets among SSIs as high as 17 per cent, it's easy to understand the lack of enthusiasm among banks to lend to this segment.

But the high NPAs (or non-performing assets) don't seem to have been viewed as much of a stumbling block by the finance minister, who wants public sector banks to achieve a minimum 20 per cent year-on-year growth in funding small and medium enterprises.

Nor is he content with merely mandating this level of lending""commercial banks (including regional rural banks) will have to make "concerted efforts to provide credit cover on average to at least five new tiny, small and medium enterprises at each of their semi-urban/urban branches annually". This is micro-management at its most extreme.

As for the NPAs, these are proposed to be tackled by a two-fold process. First, there's a One Time Settlement scheme for defaulting units. Second, banks have been instructed to include small and medium enterprises (SMEs) in the corporate debt restructuring scheme.

These procedures, and especially the restructuring scheme, will conveniently be used to brush NPAs under the carpet, and they do nothing to ensure that NPAs do not occur in the future.

What the finance minister does not seem to have recognised is that banks have good reason to be wary of financing SSIs""after all, if funding SMEs made good business sense, asset-hungry banks would in any case have sniffed out the opportunity.

That is precisely what has happened to units which are vendors or suppliers to larger companies, which have had no difficulty in accessing finance from banks.

As a matter of fact, several new private banks have been keen to tap this segment. In other words, the reluctance of banks to lend to SMEs is directly linked to their risk""where the risk can be contained, as in receivable financing, banks are keen to fund SMEs.

That is the reason why funding units with linkages to larger units was one of the three legs of the strategy recommended by the Working Group on the Flow of Credit to the SSI Sector.

Several of the group's other recommendations seem to have been disregarded, including the important one that banks should promote and finance special purpose vehicles in the form of micro-credit agencies dedicated to serving SME clusters.

The group had also pointed out that the existing definition of SSI adopted in India, based on investment in plant and machinery, excludes the rapidly growing service sector.

But instead of taking an innovative and fresh approach to the issue of SME under-financing, the government seems content to stick to the time-honoured method of throwing money at the problem.