July 28, 2015
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Tight credit: MSMEs in dire need of a solution

Lack of adequate, low-cost and timely credit, along with reputation of small business lending as being highly risky, poses hurdles before the micro, small and medium enterprises, the MSME minister informed the Parliament last week. Over 5 lakh MSME units, which are owed over Rs 33, 378 crore to commercial banks, have been reported sick as on March 2015. This situation demands higher fund flows from banks to the sector. Traditionally, SMEs have always relied on banks for funds, and with alternative funding options hardly available to them, they still cannot help doing so.

But unfortunately, our banks are never interested in financing MSMEs, and worse than that, they are currently suffocating under the weight of NPAs. According to official data, bad loans at public sector banks have increased to Rs 2.67 lakh crore at the end of March 2015 from Rs 2.16 lakh crore a year ago. NPAs of public sector banks as a whole are increasing continuously and in this situation I think the Centre should undertake urgent steps to prevent the problem from growing to a severe macroeconomic challenge. At the same time, I think a comprehensive MSME policy that addresses the lingering credit issues faced by the sector should be the topmost priority of the Centre.

For quite some time now the MSME sector has not been getting enough attention. Under UPA rule, it took several years to prepare a report by a Task Force on MSME under T.K.A.Nair, Principal Secretary to the then Prime Minister Manmohan Singh. It clearly identified lack of availability of adequate and timely credit, high cost of credit, collateral requirements, and limited access to equity capital as some of the major hurdles. But no comprehensive action followed the report to address the credit crunch challenge. Later when the NDA government came to power, some quick steps and concrete results were widely expected, but instead a new committee was formed to chalk out a policy for the sector. I think most of the problems being faced by our MSMEs are clearly evident and too simple to be studied again and again.

Meanwhile, the first quarter results of India Inc released till now gives not a pretty picture. Total net profit growth of 215 companies that have announced their results (excluding banking and financial services firms) stands at 5 percent over a year ago, compared with 12 percent in March quarter. Experts view that high interest costs have played a role in this. Net profit of several Nifty companies has fallen sharply below expectations. However, I think the corporate earning scenario will improve in the coming quarters. Some major macroeconomic drivers of growth have already turned positive, and it seems earnings are bottoming out.

I invite your opinions.

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