Waiting for the government to act: Will it, won't it?

Sunday, June 8 1997

Waiting for the government to act: Will it, won't it?

The Expert Committee on Small Enterprises headed by Abid Hussain has reciprocated the general view that small scale industries experience the supply of credit as their key problem. It is claimed that not only is the availability of credit to SSEs of high cost, it is not timely or adequate in volume. The Expert Group has, therefore, recommended restructuring of SFCs and State Industrial Development Corporations. The report mentions: "it is, therefore, necessary that the distinction between term lending and working capital institutions be done away with and banks and SFCs increasingly get into making composite loans".

Acknowledging the fact that even the specialised commercial bank branches and local area banks are not able to provide adequate credit to small scale enterprises, the Expert Group has suggested that all efforts must be made to achieve the prescribed target of providing working capital of a minimum 20 per cent of the projected turnover of the small scale enterprises.

Regarding training of staff, the Group has emphasised the need for specialised training in appraisal, evaluation and monitoring of bank staff at the small enterprises cluster level. The Expert Group has also drawn attention to a host of other credit related problems which affect SSEs viz.:

Need for credit rating agencies exclusively for SSE units.

Financing for technology upgradation and modernisation.

Delay in realisation of sales proceeds.

Non-availability of start-up equity assistance to small SSEs and venture funds to innovative projects.

Inadequate marketing infrastructure and credit for intangible marketing expenditure.

Need for functional autonomy for existing support service agencies and encouraging setting up of private sector business service enterprises in the clusters.

Inadequate credit to micro enterprises.

Need for resource support for shifting polluting units.

These recommendations are still under consideration of the Government. It is hoped that quick decisions in this respect would be forthcoming.

As may be expected, among small scale enterprises the credit problems of tiny enterprises are even more acute and, therefore, require special attention. They particularly require exceptional assistance at the time of entry, when budding new entrepreneurs may not have any credit history, nor collateral. The Expert Group, therefore, recommended that the banking system should earmark a minimum of 70 per cent of its priority lending allocated to the small scale sector to the tiny sector.

Surprisingly, this recommendation has been taken up by the Government and a decision already announced. However, instead of 70 per cent, Government proposes to reserve 60 per cent of the credit earmarked for the small scale sector, for units having investments up to Rs 25 lakh.

By agreeing to increase the ceiling on investment in small scale sector from Rs 60 lakh to Rs 3 crore, the Government has unwittingly introduced a new element in credit disbursal for small scale enterprises. A ``creamy layer'' of enterprises having investments from Rs 60 lakh to Rs 3 crore would now compete with the rest of the small scale sector for priority sector lending. And being better organised, they would be able to grab most of the priority sector credit and the ceiling of 40 per cent announced by the Government for enterprises beyond Rs 25 lakh would most probably not be enforced.

Another recommendation of the Expert Group is the proposal to develop an alternative system of financial intermediation for dealing exclusively with the needs of the tiny sector. This may be done primarily through augmenting the existing system with active involvement of the district co-operative banks, private sector local area banks and NGOs, including business/industry associations. This would ensure better appreciation of local requirements and minimise the number of transactions and costs. These institutions should have access to the existing avenues of refinancing by SIDBI and the National Bank for Agriculture and Rural Development (NABARD). The Group has also recommended creation of a revolving collateral reserve to take care of collateral guarantees for tiny entrepreneurs.

However, considering the past poor record of the Government in evolving and implementing the much touted `tiny sector package', announced as a part of the Policy Measures for Small and Micro Enterprises in 1991, it is extremely unlikely that such an innovative scheme would get full support from the Government and the nationalised banking structure.

In the meanwhile, one has to agree with the recommendations by the Expert Group for a paradigm shift in favour of tiny enterprises in respect of credit dispensation. Also, a time-bound programme may be adopted for priority investment in research and development, technology upgradation and technology transfer in view of the challenges posed by the economic liberalisation. Again, there is a strong case for easing legal constraints so as to encourage factoring and venture capital. Special attention is needed for supporting women entrepreneurs and tiny village enterprises.

Adequate financial support to the small scale sector forms an important part of the common minimum programme of the present Government. The small, particularly the tiny, entrepreneurs are, therefore, anxiously waiting for the Government to announce and implement a new package of measures for ensuring adequate and timely credit on normative basis to this `great' sector.

The author is former Industry Secretary, GoI, He will answer queries relating to entrepreneurial development

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