Commercial Banks proved
sweet nothings in their offerings to the MSEs while a myriad of their loan
products focused on medium enterprises or the mid-corporate sector.
Manufacturing MSEs
going by RBI November 2016 data reveals that they share 42.9% outstanding
credit with a negative growth of 9.2%. Manufacturing sector was the largest employer
providing employment to 30.3 million (23.1%) persons, 78.9% of whom are in
proprietary enterprises – mostly MSEs (Sixth Economic Census). Notwithstanding
Jan Dhan, financial inclusion viewed in this prism is yet to gain colours.
Demonetisation only
added further woes upsetting the credit supply to the MSEs as acknowledged by
all the Industry Associations and grudgingly by the banks. It is time to see
what is in store for the micro and small enterprise sector in the coming year’s
budget.
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:
Land, the key
input has become scarce and is highly overvalued for any rural enterprise to
access. Affordability distances the enterprise set-up. 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.
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 be the best alternative to boost this sector.
Fiscal incentives like income tax exemption for a five year period for investments
in such infrastructure would be in order.
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 should be up-scaled and modified to provide
all the logistic facilities closer to the MSEs under PPP mode. It is important
for India that has competing demands on land space to develop lease markets in
a big way sooner than later to keep double digit growth moving sustainably.
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.
District
Industries Centre for the MSEs as a delivery window has not merited appreciation
over the years in most States, save exceptions. The initial format of DIC with
part funding from the Union Government exited. Credit being an important
constituent of MSE growth, it is desirable and necessary that a credit
specialist is taken on deputation from the financial sector. This would
strengthen schemes like PMMY, PMEGY, KVIC, and also the rehabilitation efforts
as GM, DIC is a member of the Banks’ Zonal Committees. Restructuring DICs
comprehensively brooks no delay. Skill building has to take place in the DICs
as well sooner than later. States have to take action on this front.
Credit and
guarantee mechanisms should be made mandatory for certain thresholds for each
subsector among the manufacturing micro and small enterprises. Collateral security
obtained by way of the only dwelling house of any proprietary MSE, 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.
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.
Incipient failures
should be treated with expedition by the lending institutions –no more than 30
days of noticing the same as per RBI master direction. If the borrower does not
cooperate, it should be treated as willful default and dealt with accordingly
provided the process is kept transparent and subject to scrutiny.
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.
More than 120 schemes
for MSMEs from eighteen ministries of GoI and plethora of incentives from state
governments due to late reach, sparse budgetary outlays, and delay in release
of the promised incentives due to inadequate and untimely allocations dampened
Make in India in this segment. Average allocation of budget should also
announce the number of enterprises likely to get access from any incentive so
that measurement of outcomes will become meaningful. Many MSE hopefuls moved to
NPAs by the time the budgeted incentives are released either by the Union/State
governments.
RBI should reconsider
its priority sector categorization and modify its MIS for effective monitoring
of the growth of the MSE sector. Data giving number of accounts make little
sense when the number of units needs monitoring for results in the sector.
Humanising the
lending process drawn on a public sense of commitment is critical to MSME
growth and the time is ripe now.
SME Exchange meant to
assist small enterprises accessing equity markets has only around 160 listed
enterprises in the last nine years. Therefore, the promotional efforts of state
governments by way of subscribing to equity initially after due diligence by
the BSE/NSE SME window would speed up the process. The entry and exit routes
for such contribution can be through their dedicated platforms of Industrial
Development Corporations/Industrial Investment Corporations.
RBI recognising the
need for increasing supply of credit to MSMEs gave licenses to Small Business
and Small Payment Banks; introduced Trade Credit Exchanges; plans launch of
Movable Asset Registries and mandated banks to lend 7% of ANBC to Micro and
Small enterprises; and directed banks to form zonal committees to restructure
and revive the sick enterprises as far back as July 2016. Banks’ response to
all these initiatives is at snail pace.
If TRADeXchanges were
to succeed the government departments and PSUs, major defaulters in honouring
the payment terms of MSMEs should become members of the exchange when alone it
makes sense for the MSMEs to be members of the exchange for trading their
supply bills. Year down the line, this did not happen and the Union Government
at least in this budget should make this process mandatory.
The main objective of Small
Finance Banks (India Post, Airtel and a couple of others in line) is to
increase financial inclusion (to get more people into the banking
system) by providing Small Savings Accounts, Payment or remittance
services to low income households / labour, small businesses etc., and not really
to support manufacturing MSEs. Small Finance Banks are yet to start their
operations. However, NBFCs are getting into the space left off by the
commercial banks faster than expected. Extending CGTMSE cover to NBFC-funded MSEs
is recognition of this fact.
Banks speed up for CDR because
of their high stakes in the corporate sector but drag their feet for
restructuring the small manufacturing enterprises in spite of specific
guidelines from the RBI. Thanks to Raghuram Rajan, fresh working capital given
to restructured micro and small enterprises is a standard asset. Yet, less than
2% of small industry loans are restructured during the last decade is a true but
sad pointer to banks’ sinking interest in this sector. This slow pace happens
because of ineffective monitoring of the RBI, save exceptions, that it fails to
acknowledge.
Exit rules for
proprietary and partnership MSEs under Bankruptcy Code should be different and
deserve preferential treatment.
Hopes rest on
Prabhatkumar Committee Report for resolving many of the supply side issues of
MSME credit. NBFCs have entered the space vacated by the commercial banks and
this may take a long time to meet the supply-demand gap.
Banks’ compliance
risks can be addressed by ‘instituting professional credit
intermediaries/advisers for MSMEs to help bridge the information asymmetry and
thereby help better credit decisions’ (Deepak Mohanty Report on ‘Medium –term
path for Financial Inclusion’-2016). Government of Telangana took this
recommendation seriously and announced in the recently held Assembly sessions,
the setting up of Telangana Industrial Health Clinic Ltd., as a subsidiary of
TSIDC, with a corpus fund of Rs.100cr with upfront ten percent from its kitty.
*The author is an economist and Adviser, MSE Facilitation Council,
Industries Department, Government of Telangana. The views are personal.
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