Opinion - Editorials

The neglect of small businesses continues

The annual credit policy statement of the Reserve Bank of India (RBI) is unlikely to stop the declining relevance of organised sector credit to the several million-strong small manufacturing and service enterprises. In proposing a closer linkage between branches of the Small Industries Development Bank of India (SIDBI) to provide the term loans and branches of commercial banks in specified 50 industrial clusters to supply the working capital, the RBI seems to ignore the trend towards universal banking. With the limit of composite loans already raised to Rs. 1 crore, banks need little support from SIDBI to lend to most SSIs. Given that even the credit guarantee fund for SSI advances has made no substantial difference to bank credit availability to small entrepreneurs, what banks need is a policy environment that would combine the carrot and the stick in such a manner as to make them inclined to finance productive manufacturing and service activities, instead of chasing not-so-well-to-do consumers for personal advances or building up a huge surplus portfolio of SLR (statutory liquidity ratio) securities. Commercial banks had been lending to SSIs in a big way for decades till the 1990s, long before SIDBI came on the scene, but surprisingly the apex bank wants SIDBI to offer its "expertise" to banks in "appraising the credit needs" of SSIs. The RBI's silence over the role of State Finance Corporations reflects the view of a committee that showed them in very poor light and recommended that most of them be wound up.

The credit policy statement is right in saying that greater attention needs to be given to financing medium industries and enabling small units to graduate into the medium sector. But it is relevant to keep in mind the structure of the small sector before prioritising lending strategies. According to the Third Census of the SSI sector, among registered SSIs (which constitute less than 15 per cent of the total of small and tiny enterprises), proprietorships accounted for 90 per cent, partnerships less than seven per cent and private companies less than three per cent. Among the causes (not mutually exclusive) for sickness in the SSI sector, the second biggest (48 per cent) was shortage of working capital, while lack of demand (which could be partly attributed to changes in the market environment post-1991) was a factor in 71 per cent of the cases. Management issues were relevant only in five per cent of the cases. Hence it is obvious that any serious policy on meeting the credit requirements of SSIs should give priority to supporting sustainable productive activity and cannot avoid a development orientation. Micro-finance, on which the RBI places much reliance, did indeed support, with remarkable success, both productive and personal needs of lakhs of rural women aspiring to minimal entrepreneurial activity. But it may be unrealistic to expect this mechanism to play the role of financier for full-fledged entrepreneurs operating in a highly competitive market.

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