Prime Minister Narendra Modi’s announcement last week of a dozen measures for the benefit of micro, small and medium enterprises (MSMEs) should not be seen merely as election-time sops. They, in fact, constitute far reaching reforms, not just in making available credit to the crucial MSME sector, which contributes about 45 per cent to manufacturing, 40 per cent to India’s exports and roughly 8 per cent to the country’s GDP, but to also tone up the banking system that is under severe stress. By offering loans up to Rs 1 crore in 59 minutes, relaxed labour laws and easier environmental clearances, the stage has been set for much needed reforms in the MSME sector that have, willy nilly, come in for step motherly treatment by the banks and the system at large. To ease liquidity constraints for MSMEs is the crying need of the hour. It is no secret that public sector banks (PSBs) prefer to give out a huge, one-time loan to a big corporate than dole out smaller loans to medium and small scale industrial units. One, a big fat loan helps meet annual targets at one go, and two, it means much less messy paper work if, lets say, as opposed to one big company, 25 MSMEs are awarded loans.
The system, therefore, is intrinsically unsound and weighted in favour of big companies, without giving these smaller outfits the credit they deserve. A study by CIBIL and SIDBI said that the overall non-performing assets (NPAs) exposure for MSMEs stood at Rs 81,000 crore as of March this year. As for big companies, according to one estimate, corporate entities owe about Rs 9.5 lakh crore in NPAs. The combination of high credit demand and relatively low NPA rates should ideally make MSME among the most attractive target segments for institutional lenders. PSBs have traditionally been dominant lenders to the MSME sector. But in the last few quarters, private banks and non-banking financial companies (NBFCs) have successfully competed with PSBs in getting a larger share of the MSME pie. Micro and SME exposure (of less than Rs 25 crore) accounts for about 20 per cent of PSBs’ total commercial outstanding credit as of March 2018, compared to 28 per cent in private banks and 30 per cent in NBFCs. Therefore, the prime minister’s promise of easier credit comes at a time even as the government continues to press the RBI for relaxing non-performing loan guidelines for the sector. Even otherwise, the small industrial units that have been at the receiving end of demonetisation and rolling out of GST need the healing touch, which the prime minister has offered as part of this initiative. In a further streamlining of the system, the loan option for GST-registered firms will now be available though the GST portal itself. These firms will also get a 2 per cent interest subvention on fresh or incremental loans. That certainly is music to MSME ears, as it would help the smaller industries to avail credit at competitive rates.
The MSME sector believes that the prime minister’s latest announcements are bound to increase the flow of credit, as there is a 50 per cent drop — from Rs 41,500 crore to Rs 20,500 crore — in export credit this year as compared to last year. But above all, Modi’s offer represents a clear case of technological upgradation in the functioning of banks who will now have to improve their lending systems, if the 59-minute deadline has to be met. If this embargo has to be strictly adhered to, long-drawn, red-rape bottlenecks will have to be abandoned in favour of more thoroughgoing and efficient systems. In that sense, Prime Minister Modi’s deadline proposal represents a challenge as well as a huge opportunity to upgrade the banking systems, which is in dire need of repair, not the least in its lending systems that have led to a huge NPA base. All told, PM Modi’s offer for MSMEs must be regarded as an important move, as they account for little over 90 per cent of the total industrial units in India. A sector that contributes so much to the economy, indeed forms the bedrock of India’s fabled growth, certainly deserves this assistance. And the Prime Minister seems to have kept that in mind.