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Let the wheel move again
Rasika Gokhale Athawale
Jan 2009
Jan 2009
Page 1 of 2
In the natural scheme of things it is likely for entities that are weak to be wiped out and be replaced by those that are well-built. In the same way, industrial units that are inefficient or unproductive get substituted by more competent ones, more so in a dynamic business scenario. Nevertheless, it is essential to not allow the viable ones to perish as well as check the tendency to label every sick enterprise as irreparably damaged. Enterprises' demise can affect the economy.
Small enterprises are vulnerable, not having robust financial strength, and therefore, susceptible to the slightest changes in working environment. They are the hardest hit in an economic downturn. It is imperative that those units, which have fallen sick but are viable, get nursed and are provided timely assistance by way of renegotiation of terms of loans, induction of fresh dose of funds as well as business restructuring and change of management. Pro-active measures should begin right at the stage of incipient sickness/potential sickness. The report of the working group of RBI in respect to the priority sector or SSI Sector under the chairmanship of KC Chakrabarty gives a thorough treatment to the issue of sick SMEs and their rehabilitation.
Milagrow, a venture catalyst firm focused on small businesses, has stated unavailability of capital, lack of managerial expertise as well as government delays as major reasons for sickness of MSMEs (Micro, small and medium enterprises) in a study. Obsolete technology and need for technological upgradation, lack of adequate infrastructure, such as, uninterrupted power supply and all weather roads, delay in getting clearance from different agencies, global meltdown, and lack of entrepreneurship development infrastructure plague MSMEs.
Delayed payments from large corporate firms further worsen their condition. These firms use their purchasing power to delay payments, and the smaller units being dependent on them for their business are not in a position to complain. With the credit crunch in the economy as well as sagging demand, suppliers find themselves in a difficult condition.
Tough competition is another reason attributed for the slow growth of SMEs. Competition from foreign entities, limited budget for marketing, lack of market intelligence on the demand, non-availability of inputs at reasonable prices as well as equipment problems are significant issues.
The high rate of NPAs in small enterprises sector has created risk aversion among lenders, which has hindered increase in flow of credit to the sector. Non-performing asset is a loan or lease that is not meeting its stated principal and interest payments. Non Performing Assets(NPAs) classified by banks are - commercial loans which are more than 90 days overdue and consumer loans which are more than 180 days overdue. In a wider sense, it means an asset which is not generating income. (Source: the web, investorWords.com)
A banker's risk perception towards SMEs is heightened by the poor historical performance of SME loan portfolios, particularly loans extended by the public sector banks, which account for more than 90 per cent of all lending to SMEs. While these banks have large SME portfolios, the NPAs have been extremely high. However, NPAs have been gradually coming down from 21.36% in 2001 to 5.58% in 2007 and the level of gross NPA has reduced from 15.58% to 2.93% during this period. Thus despite the reduction of NPA in small enterprises by 75%, they still stand at double the NPA level in total advances as on 31-03-2007. (Source: RBI)
Lending to MSMEs is perceived as a risky proposition by banks and the funding pattern is skewed towards large corporate firms. This leads to paucity of fund for small enterprises. According to the report by RBI working group, asymmetric information, low economies of scale for lenders, high demand for collateral, high risk perception towards small enterprises are reasons for poor credit flow from the formal sector to SMEs.
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