Vepa Kamesam, the Reserve Bank of India (RBI) deputy governor, today made a strong pitch for taking steps to strengthen and popularise factoring services without recourse to small scale industry (SSI) suppliers.
"This is the only way for improving the plight of SSI entrepreneurs who have been suffering from delayed payments," he said.
He was speaking at a symposium on "winning strategies in small and medium enterprises finance" organised by the International Finance Corporation and Federation of Indian Chambers of Commerce and Industry.
"Considerable delay in settlement of dues/payment of bills by large-scale buyers to SSI units adversely affected the recycling of funds and business operation of SSI units. Though the government has enacted the Delayed Payments Act, many of the SSI units are reluctant to pursue cases against major buyers," Kamesam said.
The banks have also been advised about sub-allotting overall limits to large borrowers, specifically for meeting the payment obligations in respect of purchases from SSIs. It is expected that these measures will improve the situation of delayed payments, he said.
The most problematic area for the SSI sector is marketing as some of the units are too small. Adopting a consortium approach could best solve the marketing problems of the sector, said Kamesam.
According to him, the growing incidence of sickness of SSIs is an area of concern. The mortality of SSI units has been showing increasing trend. This has wider implications including locking of funds of the lending institutions, loss of scarce material resources and loss of employment.
Around 10 per cent of the SSI units are sick and the number of units identified as potentially viable as a percentage to total sick SSI units is around eight per cent.
The major causes of weakness are limited financial resources, lack of organisational, financial and management skills and expertise, diversion of funds, diversification/ expansion before stabilisation, non-availability of power supply shortage of raw materials, marketing difficulties, delayed and inadequate credit, globalisation and liberalisation of the economy, obsolete technology, inadequate infrastructure, etc.
According to Small Industries Development Bank of India chairman and managing director P B Nimbalkar, there are large gaps in the credit requirement if one goes by the thumb rule that 20 per cent of the turnover of a small unit should be made available as working capital.
There is an opportunity for financial sector intermediaries to step up their lending to the sector more so when large industrial units are able to raise funds on their own from capital and debt market without involving the banks.
