Micro, small and medium enterprises (MSMEs), which constitute the backbone of the industrial and services sector in India, are most vulnerable to any downturn in demand. Thanks to the global financial crisis, units in this sector have got ample taste of this over the past year.
The escalation of the global financial crisis following the collapse of Lehman Brothers on 15 September 2008 hit MSMEs badly in two ways. First, there was a sharp drop in demand, especially in external demand. Payments were delayed or stopped, as trade finance froze due to a loss of trust among banks and financial institutions.
Second, many large Indian companies, which are among the most important customers for MSMEs, began to either delay or default on payments. MSMEs could negotiate in order to salvage a part of the outstanding money and could look at legal redress to recover payments, but such a step would have meant loss of business.
While banks, nudged by the Reserve Bank of India (RBI) and the government, came up with special financing schemes, the benefits were limited. State-owned banks raised the cap on working capital in December 2008. They also slashed interest rates by 200 basis points. This helped small units to reduce somewhat the burden of interest payments.
What came as a vital source of support to SMEs was the RBI’s go-ahead for the restructuring of stressed assets. Many SMEs which were viable faced cash-flow problems, and the RBI move ensured that such units stayed afloat. M Narendra, executive director with the Bank of India, says, “The restructuring gave them space to rework businesses and finance. We now see some improvement in demand for credit from small units. The outstanding credit, however, may not rise rapidly.”
Bank credit to MSMEs forms a major segment of total credit to the non-farm sector. The outstanding credit to MSMEs rose by 20.38 per cent to Rs 257,072 crore at the end of March 2009.
The total credit provided by public sector banks to the small enterprises sector at the end of March 2009 amounted to 26.5 per cent of the total priority sector advances of these banks. The credit provided to small enterprises by private banks at the end of March 2009 formed about 11.8 per cent of adjusted net bank credit.
A senior executive with ICICI Bank expects the bank to increase revenues from its SME business segment by 15-20 per cent in the current financial year. The bank’s SME loan book increased marginally to Rs 7,924 crore in the quarter ended June 30, 2009, from Rs 7,845 crore in the April-June 2008 quarter.
Recovering from the effects of the long-drawn-out slowdown, the global economic environment is showing some signs of recovery. This provides hope for SMEs in India to procure new business.
