by Rajen KumarIndia's Manufacturing Muddle
What holds Indias manufacturing sector at the back foot? Why the sector has failed to emerge from the shadow of a strong service sector which has recorded a creditable growth in the...
Special ReportsMar 2014
When you have just decided to go ahead and chase your dream of higher studies, the one you had sidelined for quite some time now, you realize the road ahead is not so...
The markets are in jittery, and for valid reasons. The rupee has hit an all-time low of Rs. 53 and macroeconomic indicators of the economy are sagging. Industrial production is on a downward spiral. Policymaking is ground to an apparent halt, and the rollback of the decision to open up multi-brand retail has sapped investor confidence. The negative growth registered in industrial production in October, a sharp 5.1% decline, and shows that industrial productivity is slowing far more rapidly than expected.
All these pose greater risks for overall economic growth in 2011-12, already watered down to 7.6%, with further downward revision on the cards. For now, slowdown worries take their toll on capital goods and company stocks. Its impact is going to be more severe on micro, small and medium enterprises (MSMEs), which have been already running through bad time a rough patch, affected with huge financing gap and consistent decline in global demand for their products.
Are the Banks really giving credit to MSMEs?
Despite being hamstrung by these, MSMEs rely on open market for their business finance, as internal mobilisation through informal sources makes the business more vulnerable. Though the socioeconomic importance of MSMEs is well recognised in academic and policy circles, they are starved of funds, with little interest shown by institutional investors. The priority sector lending policy outlines that 40%of net bank credit of public and private sector banks must be earmarked for those sectors, which include MSMEs. The policy stipulates 32% of net bank credit of foreign banks for the priority sectors, of which 10% is allocated to MSMEs. But barring regional rural banks, how many banks comply with this criterion? In the absence of proper channelisation, the mandated allocation hardly makes a difference to the business of the firms get financed by them.
Separate Needs, Separate Measures
Here, it's imperative to keep in mind that the MSME sector is not homogenous, but is constituted by three different sub-sectors. These sub-sectors need to be serviced separately. For micro enterprises, access to credit is priority. For small enterprises, access to credit is relatively easy, though limited, and therefore remains important along with cost. For medium enterprises, access to institutional finance is easy though the cost incurred on credit is quite high. Collateral based lending offered by banks and financing companies is normally made up of a combination of asset-based finance, contribution-based finance and factoring-based finance using reliable debtors and guarantors. Substantial numbers of MSMEs are falling short on collateralised security needed for bank loans, and lack the prospect of high returns to attract formal venture capitalists and other risk investors like private equity funds. Moreover, market is also suffering from deficient information, diluting the effectiveness of financial statement based lending and credit scoring.
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