Raghuram Rajan took over as governor of the Reserve Bank of India (RBI) about five months earlier. It is time to look at whether anything has been done about his own recommendations to boost exports from micro, small and medium enterprises (MSME) sector.
As the then chief economic advisor to the Government of India, he was a member of the Inter Ministerial Committee for boosting exports from the MSME sector. It gave a report in July 2013, two months before he became RBI governor. The committee identified many issues; on finance, it recognised lack of availability of adequate and timely credit, its high cost, the collateral requirements being insisted upon by banks and limited access to equity capital as common problems for most MSMEs.
To reduce the cost of credit, the committee had recommended an additional two per cent interest subvention to MSME exporters which repaid on time, a separate sub-limit of, say, eight per cent for credit to MSME exporters within the overall priority sector limit, provision of interest subvention to all exporters promptly, reduction of the maximim interest rate to two per cent over Libor for export credit in foreign currency, automatic increases in credit limits, earmarking 50 per cent for MSMEs under the swap facility scheme and so on.
On ways to increase access to finance, it recommended keeping 40 per centof export credit for MSMEs (in proportion to their share in India's total exports) and inclusion of 'export credit to MSMEs' as an eligible sector for deployment of half of the respective bank's shortfall in priority sector lending, Also, targets to banks for a 10 per cent increase in new MSME enterprises' borrowers on an annual basis between 2013 and 2017, plus the adding of say, 12 new exporting MSMEs per branch in their semi-urban and urban networks every year. And, increase in the buyer's credit limit under the automatic route to $50 million, a uniform credit rating format and process and relaxation in RBI's external commercial borrowing norms, so as to allow all categories of MSME engineering exporters to raise these for import of capital goods and equipment. Besides, an increase in guarantee coverage under the Credit Guarantee Fund Trust for MSMEs to at least 10 times the present corpus.
On September 25, RBI advised banks to compute the overall export credit limits of borrowers on an ongoing basis, say, monthly. This was to be based on the prevalent position of current assets, current liabilities and exchange rates and re-allocating the limits towards export credit in foreign currency, even if this meant increasing or decreasing the rupee equivalent of the foreign currency component of export credit. Alternatively, banks could denominate the foreign currency (FC) component of export credit in the foreign currency, ensuring exporters were insulated from rupee fluctuations. The FC component of export credit, sanctioned, disbursed and due was to be maintained and monitored in FC; for translation of FC assets in the banks' book, the ongoing exchange rates or foreign exchange dealers' association rates could be used.
However, apart from this instruction, I have noticed very little action on most of the other committee recommendations. Rajan should pass on a copy of these to his staff at RBI. He should have the recommendations implemented or explain why these cannot be done.
email: tncr@sify.com
