MSMEs worst hit by rate hikes lose competitiveness

Micro and Small Enterprises hit by rate hikes:
B. Yerram Raju¥

MSMEs, invariably extolled as a growth engine, are in a pathetic state with the frequent hikes in interest rates on one hand and delayed payments from their vendees – large enterprises, state and central government departments and Public Sector undertakings on the other if one were to go by the discussions of the seminars that the Institute of Small Enterprise and Development, Kochi held at a few of centres like Hyderabad, Ahmedabad, Bengaluru, Chennai, Lucknow, Kanpur etc. Lending institutions, following the repeated increases in key policy rates by the RBI, raised the interest rates on advances as many as ten times in the year. Working capital is available only at a huge cost – varying from 15 to 17 percent. On one side, the debtors started mounting and on the other, Banks squeezed credit and made it costlier too. These two acts together have made them wholly uncompetitive. Most of the entrepreneurs have also expressed that Banks are most unwilling to go by the much-touted MSE risk mitigation instrument – guarantee from the CGTMSE because of the complicated procedural issues in claiming the covered amount. Several entrepreneurs also expressed serious reservations on the way the RBI monitors its instructions relating to the credit for the sector. This brief article looks at some of the data available in this regard in the light of the ire of the customers in the sector.

I tried to look at this from the data put out by the RBI in its latest Annual Report and other reports of SIDBI. In 2005-06 annual budget of the Union Government, the Finance Minister announced that each commercial branch, on average lend to at least five new units per annum. This would mean an average of 3lakh to 3.5lakhs. There is no evidence that this guideline has ever been monitored by the RBI. If this were to happen, then during the last seven years 26-27lakh new units and along with them employment to at least 11-12mn persons would have been created.

SIDBI the Bank dedicated for micro, small and medium enterprise credit also moved to medium enterprise credit and totally ignored the micro and small enterprise credit. During the year, 2009-10 the variance in credit outstanding to the MSE is 22.1% and medium enterprises is 8.6%. The Banks seemed to have hurriedly corrected their portfolio in this area in 2010-11: MSE credit has fallen to 11% and medium enterprise credit increased from earlier 8.6% to 39.2%. One possible explanation that the MSME Ministry and the Banks too would be conveniently offering is that so many enterprises migrated from small to the medium category because of the growth impulses generated in the economy. But the fact is that the job oriented and production intensive micro and small enterprises actually took a beating at the hands of the dexterous and enthusiastic bankers. Similarly, one will be astonished at growth in financing to NBFCs by Banks, which has increased from 14.8% in 2009-10 to 54% in 2010-11. This is nothing but lazy banking. Quite likely, that the NBFCs are financing the Agriculture and MSE sectors at high rates of interest. This needs a deeper probe.




Even otherwise, out of 261mn enterprises in the sector, only 36mn enterprises are under the umbrella of institutional credit representing just 13.79 percent. As at the end of March 2010, the total outstanding credit provided by all Scheduled Commercial Banks (SCBs) to the MSE sector was iNR 3.62bn accounting for 13.4 percent of the Adjusted Net Bank Credit. Credit flow (ANBC) to MSEs had therefore, nearly tripled from INR 1.27bn in 2006-07. Per unit, credit is of the order of INR 6.22lakhs. By June 2011 only 80 units have been added in Bankers’ books and per unit credit has gone down drastically to just INR 0.98lakhs. Year on year growth target of 20 percent for the sector, fixed by the RBI is nowhere in sight. In fact, as can be seen from the above table, it has fallen down from 13.4 percent in July 2010 to 9.9 percent in July 2011. While the lenders felt that credit to the sector is expanding, the MSME borrowers felt that the lenders are not doing enough for the MSMEs and are catering more to the needs of the large corporates. According to the fourth census (2006-07), only 7% of the total MSME use finance from institutional/non-institutional sources whereas a majority (92%) either do not use credit or self-finance their establishments.

Chakraborthy Committee (2007) recommended that all units requiring credit up to Rs.10mn should be assisted at the Branch level as such units require proper due diligence, monitoring and supervision. Banks have migrated to centralized processing platforms and even then, entrepreneurs of standing shared with me that their proposals take no less than two months. Their queries are based on the templates created and not on enterprise capacity and entrepreneurial capability.

Credit Rating, less said the better. Under the centrally sponsored scheme, the credit rating of a micro and small enterprises is assessed on a scale tailor-made for the small entities. The scale comprises assessment on performance capability and financial strength. Until March 31, 2010, 19,233 small entities have been rated by 7 empaneled rating agencies, with more than 12,500 small entities having been rated in the FY 2009 and FY 2010. Twenty thousand enterprises out of about 36mn getting rated is a drop in the ocean. The rating agencies are not able to sell their rating products because their rating models are a poor replica of corporate debt rating products.

The demands on the MSMEs in terms of technology infusion, cloud computing, environmental friendly processes, and HR interventions, just to highlight a few, are on the rise. But who would give the money for all these and ensure that they are in the globally competitive arena, if the banks show the door and private equity is an uninviting mood? In fine, the saga tells us that new MSE units financed are far and few; per capita credit is on the decline; interest rates are on the rise; risk management of the sector poor; collateral dependence continues to rule roost; innovations almost stagnant and there would appear to be risk aversion. It is time that the RBI wakes up to reality and takes appropriate policy corrections in the interest of growth.