Amid a major decline in credit growth in the economy this year, micro, small and medium sector players are among the worst hit as banks continue to practice caution in lending to the industrial sector. However, there may be some respite in the offing as Nirmala Sitharaman, the Minister of State for Industry and Commerce, is not only calling for a cut in interest rates but is also set to ask the finance ministry to nudge the banks to look at SME funding afresh and address their issues including fund requirement.
Once addressed, this may come as a huge relief to entrepreneurs within the segment who have either been looking for additional funding or have been planning to raise initial capital for their ventures. It may also provide thrust to the government initiatives such as ‘Make in India’, ‘Startup India’ and ‘Stand-Up India’ which are expected to drive small industries in the country and boost job creation.
“I will ask the finance ministry to advise banks on taking a fresh look on the issue of SME funding,” said Sitharaman while speaking at the Idea Exchange programme of The Indian Express. Stating that the small and medium enterprises are present across sectors and spread throughout the country, she said that helping SMEs would mean helping labour-intensive industries across the country which generate jobs at the local level.
The minister’s concern is in line with the continuous fall in credit growth and more so in the medium, micro and small enterprises across the country. A look at the credit deployment data for scheduled commercial banks for the first six months of the calendar 2016 reveals that the credit growth for the industry has been on a continuous slide.
While the credit growth for the overall industry has steadily declined from 5.6 per cent in January 2016, to hit a low of 0.6 per cent in June 2016, it is the medium, micro and small industries which are facing the maximum pain.
While medium scale industries have seen the pace of contraction in credit growth widening from (-)7.1 per cent in January to (-)9.5 per cent in June, micro and small industries have, on an aggregate, seen their credit growth decline from 2.4 per cent to (-)3.8 per cent in June. So in six months, the sector has moved from a position of positive credit inflow to contraction.
By comparison, the large industries are still witnessing some growth, though lower than what they had witnessed in January. While the credit growth for large companies, on an aggregate, rose by 7 per cent in January, it stood at 2 per cent in June.
While the government has been looking to provide support to startups and has announced ‘Startup India’ initiative to foster entrepreneurship and promote innovation, it has also initiated ‘Make in India’ programme which aims to push manufacturing in the country. While many feel that these two initiatives will strengthen MSMEs, the government’s proposal in the MSME (Amendment) Bill, 2015, to raise investment limit in plant and machinery for micro enterprises from Rs 25 lakh to Rs 50 lakh; for small enterprise from Rs 5 crore to Rs 10 crore and for medium enterprises from Rs 10 crore to Rs 30 crore is expected to bring more companies within the group to avail benefits and become competitive.
A recent report on MSME’s prepared by CII and Crisil pointed that even though credit requirement of these companies is low, it is not easily met. The report points that while the funding requirement of these enterprises was typically between Rs 1 lakh and Rs 25 lakh, it was largely unmet.
“Only 5.18 per cent of the units (both registered and unregistered) had availed of finance through institutional sources and 2.05 per cent from non-institutional sources, which means a whopping 92.77 per cent did not have access to credit or depended on self-financing,” the report said.
While the industry players have been meeting the government to address their issues over the last two years, there seems to be some activity within the government to address those concerns and Sitharaman talked about addressing various concerns of the sector.
“Interest rates though are a very big issue but other issues that also need to be addressed are — their cash requirement, timely payment requirements, issues they have with exporters and the fact that the benefits announced for them don’t reach them,” she said adding that various groups of SMEs have met her ministry and the finance ministry over the last two years and raised their concerns.
It, however, remains to be seen as to how banks, who themselves are saddled with high NPAs, come out of it and increase their lending to those operating at the bottom of the pyramid. Also, while the banks have reduced their deposit rates, they have not passed the benefits of lower interest rate to their borrowers and even that needs to be addressed.