Representatives of micro, small and medium enterprises (MSMEs) have asked Finance Minister P Chidambaram to set up a committee to monitor whether such enterprises are benefitting from the directives issued periodically to banks by the Reserve Bank of India (RBI), to the effect that ample credit must be made available to them at moderate interest rates.
While welcoming the finance ministry’s directive that foreign currency loans must be provided to the MSME export sector, M Rafeeque Ahmed, president of the Federation of Indian Export Organisations (FIEO), in a letter to the finance minister, also hoped that large banks would provide funds at a mark-up of not more than 10 basis points, thus reducing the interest rate on Packing Credit in Foreign Currency (PCFC).
He added that the cost of rupee credit has gone up substantially, following the RBI’s 13 successive hikes in policy rates since March 2010. As a result, many exporters were availing of the foreign currency loan window, which was steadily drying up.
The difference in cost of credit between Indian MSMEs and their competitors is in the range of five to six percentage points, he said. “We are unable to match any of our competitors’ prices, especially China, where the cost of credit is only 6.5 to seven per cent, while ours goes up to 14 per cent,” he told Business Standard.
On the availability of credit, he said, “There is no flow. Banks are shying away from MSMEs, which cater to both domestic and international markets. For exports, foreign currency is not available at all.” The declining share of export credit as a percentage of Net Bank Credit (NBC) and also as a percentage of exports is adversely affecting exports, he said.
While the compound annual growth rate (CAGR) of exports over the last decade was 19.11 per cent, that of export credit was far lower at 13.45 per cent. Export credit as a percentage of NBC has declined over the years, to only 4.2 per cent as on December, 2011 compared to 9.8 per cent as on March 24, 2000.
A recent study by the International Finance Corporation and the Japanese government, titled MSME Finance Market in India, stated that the debt gap is Rs 2.3 trillion ($46 billion) for micro enterprises, Rs 0.5 trillion ($10 billion) for small enterprises, and Rs 0.1 trillion ($2 billion) for medium enterprises.
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The gap in debt finance is primarily due to unserved micro enterprises and underserved small enterprises, the report said.
“There is an apprehension that since banks now operate in an environment of de-regulation, advisories such as the RBI’s often succumb to the pressures of profit and bottom lines. Hence in order to obviate such a situation, a monitoring committee must be put in place by the ministry of finance, to enable all MSMEs to benefit from the RBI’s directives,” said Ahmed.
RBI Deputy Governor Anand Sinha said at a recent conclave on MSMEs that that the central bank had issued instructions to all banks to ensure timely flow of credit to the MSME sector. It had also raised the limit for collateral-free loans. Yet, “Only five to seven per cent of MSMEs get institutional funding,” he was quoted as saying.
In order to increase credit flow, RBI Deputy Governor KC Chakrabarty said at the same conclave, the central bank has already advised banks to achieve a 20 per cent year-on-year growth in credit to SMEs. “RBI is closely monitoring the achievement of targets by banks on a quarterly basis and banks have been advised to devise strategies to step up their lending to micro units,” he added.