New Year leaves many in
hope with the MSMEs no exception. Their share in GDP at around 8% currently has
prospects of moving to 15% by 2020 according to a KPMG-CII Study in October
2014. Hopes are built on the double digit growth of a few manufacturing sectors
by that time and the FDI interventions in defense, pharma and infrastructure
sectors. Not so encouraging, however, is the decline in credit growth in the
manufacturing sector from 13.7% a year
ago to 7.3% in December 2014.
The Government has no
doubt infused some confidence building measures, like a few start-up Funds for SC
entrepreneurs, revisiting the definition of the MSMEs and credit policies.
Action seems to be far slower than announcements. Even earlier there were 32
Funds announced for the sector at different points of time that did not create
the impact one would expect.
At least ten things need
to be done by the Government if the MSMEs should move to building brand image
for India and they will be all in any case, Make-in-India only.
1. Segregate the Micro
and Small from medium Enterprises by redefining the sector without delay so
that the incentive structure would be geared to promote the entrepreneurship in
a big way for the micro and small start-ups for the following reasons:
There are three
distinct categories in the MSME sector that deserve careful inquiry and
out-of-the-box solutions.
1)
The Micro enterprise sector, largely unorganissed, consisting of artisans,
village craftsmen, micro entrepreneurs and small service operators function from
cultural domains and inherited skills and locally available raw materials.
2)
Manufacturing sector in the micro segment: the carpenters, the cobblers, the
black smiths, gold smiths and copper smiths in villages. Several of these two
categories are in the proven inefficient KVIC umbrella. KVIC as intermediary
financier is the biggest single NPA in the MSE lending portfolio of the PSBs. This
political outfit needs cleansing sooner than later.
3)
Manufacturing SMEs: These are the core small and medium manufacturing
enterprises requiring structured finance products and export finance with banks
investing their good time in due diligence and careful supervision. Both
enterprise specific and entrepreneur specific credit support is required.
Action rests with the
Central Government and the financial sector.
2. Start-up MSMEs find it
almost impossible to invest in land because of its prohibitive cost. Building
rural industrial townships by the States with the required infrastructure like,
safe drinking water, industrial water, electricity, packaging, testing and
branding or co-branding facilities, multi-storied residential complexes for the
workers on lease basis with industry participation, primary and upper primary
schools, crèches, play grounds and cultural spaces would boost this sector.
Industrial work space should be made available on leasehold basis for 15-20
years with permission to mortgage leasehold rights in favour of lending
institutions. Existing urban industrial estates currently existing should be
up-scaled and modified to provide all the logistic facilities closer to the
MSEs under PPP mode.
3 District Industries
Centre for the MSEs as a delivery window is most inefficient in most States,
save exceptions. Restructuring DICs comprehensively brooks no delay. Skill
building has to take place in the DICs as well. States have to take action on
this front.
4. Credit and guarantee
mechanisms should be made mandatory for certain thresholds for each subsector
among the manufacturing micro and small enterprises. Any collateral obtained
beyond the rule shall be declared as ineligible for lending institutions to
proceed against in the event of failure of the unit. Valuation of mortgaged
securities should be done annually by the banker to pare with the outstanding
credit. Trade receivables and credit exchange recently set up by the RBI should
be monitored for results at the SLBCs.
5. All the MSEs should
be provided credit at no more than 9% for meeting their working capital
requirements. They should be all cash flow based lending. The work order should
be the basis of lending instead of a balance sheet and ratio based lending.
6. Incipient failures
should be treated with expedition by the lending institutions – say, no more
than six weeks of noticing the same. If the borrower does not cooperate, it
should be treated as willful default and dealt with accordingly.
7. Government being the
owner of industrial workspaces in industrial estates, should be able to
re-allocate to another entrepreneur once the existing entrepreneur is given the
exit chit, with due notice. Such allocation should be unrelated to the
liabilities of the existing failed entrepreneurs, who should be dealt with on
independent platform.
8. SIDBI should prove
its supremacy over the other primary lending institutions and should be seen as
a guide and benefactor to the MSEs and the small banks. It should also be
restructured to cater to the sophisticated medium enterprises and mid-corporate
enterprises distinct from the MSEs. Its current micro finance lending window
should be operated through a separate subsidiary to give focused attention to
the MSEs.
9. RBI should reorder
its priority sector categorization and modify its MIS for effective monitoring
of the growth of the MSE sector.
10. Bankruptcy Law/Exit
Law has to be enacted with no further loss of time.
Humanising the lending
process drawn on a public sense of commitment is critical to MSME growth and
the time is ripe now.
Innovation holds the
key for inclusive entrepreneurship. If ‘Make in India’ were to succeed it
should happen in rural India as well. In several States rural entrepreneurship
is very backward mainly because of the following reasons:
1. Land, the key input
has become scarce and is highly overvalued for any rural enterprise to access.
Affordability distances the enterprise set-up.
2. The entrepreneur cannot
access the needed infrastructure with full compliance to regulations because he
is ignorant of the latter. He realizes the cost of compliance is going to
exceed the cost of avoidance.
3. (S)He lacks proper
guidance in packing and packaging his product. Even when the product meets the
quality standards, his ability to incur marketing costs to put it to effective
sale is extremely limited.
4. His ability to store
it for a better price is thwarted by inadequate bank finance.
5. Most often
non-collateral based credit is unavailable from institutional lenders. This
drives him/her to high cost credit that makes the product up front
uncompetitive. Finally, market throws him out and lenders strangulate him.
6. He realizes that he
has no exit route. He suffers ignoble
exit.
Government of India
announced recently MSME Venture Funding to the extent of Rs.10000crores. The
rules of administering this Fund have not yet been made public. Most funds in
the past as well were announced in non-transparent manner. This makes it
inaccessible. If such funding goes in tandem with the state governments’
initiatives and makes the incremental benefits enhance, rural entrepreneurship
would benefit.
Coming to specifics,
Telangana Government’s
most progressive industrial policy should focus on promoting new start-ups in
rural hinterland. This requires change in mind-set of the officials of the DICs
that should move from mere compliance to compassion; from doles to extension;
and from arm-chair approach to facilitation. Having a good policy is only the
first policy. Its implementation rests on culturing the deliverance and
effective quarterly monitoring for results at different levels.
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