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LATEST NEWS UPDATES | Small industry needs a better policy deal -Pradeep S Mehta

Small industry needs a better policy deal -Pradeep S Mehta

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published Published on Feb 20, 2015   modified Modified on Feb 20, 2015
-The Hindu Business Line

A flexible approach to collateral will improve access to bank funding. Red tapism too is a perennial concern

If the Make in India campaign has to be successful and help many in our country, we need to focus on enabling small units to function and contribute. A major problem small and medium units face is that of finance.

Banks and financial institutions are always very wary of assisting them in an optimal manner because of mistrust and the fear of bad debts.

But if we see how big business houses are defaulting on their commitments, figures of which run into lakhs of crores, the losses arising out of defaults in the micro, small and medium enterprises (MSMEs) sector seem quite insignificant.

Access to finance

The MSME sector is often referred to as the backbone of the economy, but this sector faces immense challenges when it comes to access to finance.

Finance is not only required to start a business but also for sustenance, diversification, modernisation as well as expansion, and the lack of which can severely hamper growth of the sector.

This is a major concern area, which demands the urgent attention of the policymakers.

Small businesses are known to be the engine of growth across the world. In India, the sector contributes eight per cent to the gross domestic product (GDP), 45 per cent to the manufacturing output and accounts for 40 per cent of the country's exports.

Moreover, India is home to nearly 30 million MSMEs, producing close to 8,000 quality products, providing employment to almost 60 million people and creating around 1.3 million jobs every year.

Unfortunately, these units very often face major challenges in securing loans, as is evident from a study by US-based Entrepreneurial Finance Lab, which reports that close to 92 per cent of MSMEs lack access to formal sector finance.

Other key issues plaguing this sector are the dearth of skilled labour, enterprises operating with outdated technology, lack of innovation, inadequate infrastructure, delayed payments, absence of proper marketing and procurement services, lack of proper training and guidance provided to entrepreneurs, among others.

Collateral issues

The government does launch schemes and promotions, such as purchase preference, to support MSMEs. However, another hurdle is the limited number of registered units which have access to those schemes.

Some estimates suggest that as high as 96 per cent of the enterprises are not registered and thus, unable to benefit from the support structures provided by the government.

Small entrepreneurs often start with just an idea, with limited capital and little knowledge of the regulatory structures and financing options available.

They face difficulties in obtaining working capital and often do not have any collateral to pledge.

In turn, banks are wary of granting loans due to the high risk perception associated with the sector, insufficient financial records of the MSMEs and difficulty in evaluating their creditworthiness.

Additionally, these loans are often seen as costly by the financial institutions due to the intensive fieldwork, administrative costs and scrutiny required for each application. Even after the provisions of collateral free loans and the government setting up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), entrepreneurs face challenges in securing loans from the banks.

As per a report by the International Finance Corporation (IFC), a member of the World Bank Group, the financing gap in the sector is close to 2.93 trillion.

Sometimes, the bankers themselves do not have adequate knowledge and training to deal with requests from this sector and lack of accountability results in many entrepreneurs leaving without having secured loans.

Another critical factor is the impact of delayed payments on this sector. Entrepreneurs do not have sufficient working capital and delayed payments significantly hamper the working of the business.

Though the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 provides for interest to be accrued on delayed payments and provides for Micro and Small Enterprises Facilitation Councils to deal with these issues, the scenario remains unchanged as many states have not yet established these councils.

Wherever these exist, they do not even meet regularly, and also lack the necessary authority.

Funds and execution

The government has taken a step in the right direction by indicating the development of a policy for the sector and also released a consultation paper for comments. Financing is a key challenge which needs to be effectively addressed. The government should also look at innovative measures for financing, which could include NBFCs.

For example, the West Bengal government has recently released a Micro Business Credit Card through which small and medium entrepreneurs will be able to obtain loans up to 5 lakh without the need of collateral, and has created a fund of 200 crore for this purpose. A Committee was set up last year by the Ministry of Finance, for developing the financial architecture for MSMEs which submitted its report to increase the lending from 10 lakh crore to 30 lakh crore. Entrepreneurs often need hand holding for dealing with financial matters.

Cumbersome procedures and extensive documentation further add to the woes of the entrepreneurs. While big business has staff to deal with them, small businesses do not.

The government often releases extensive schemes, allocating huge amounts of money for the development and growth of the sector.

However, a scheme is only as good as its implementation. If policy expectations are great, expectations from delivery mechanisms are even more so.

The writer is the secretary general of CUTS International. Tunisha Kapoor of CUTS contributed to the article


The Hindu Business Line, 19 February, 2015, http://www.thehindubusinessline.com/opinion/columns/small-industry-needs-a-better-policy-deal/article6913391.ece?homepage=true


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