Credit to SSIs is a continuing problem

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: The Reserve Bank of India has recently written to commercial banks to include the officers of Small Scale Service Institutes (SISIs), having expertise in cluster development, in state-level committees on credit. Earlier, RBI had suggested banks focus on 60 category ‘A’ clusters to increase lending to the sector. However, credit flow to the sector remains a cause of worry, as the proportion of credit to SSIs among total bank credit is still not showing any sign of recovery.

Even more worrisome, new enterprises are not being ‘born’ in anything like the required scale, as pointed out by the recent SSI census. The relationship between risk and return has increasingly become unattractive in the SME manufacturing sector, relative to trade, both in goods and services and to executive jobs in the corporate world. Manufacturing on a small scale is being increasingly considered as not worth the trouble.

The demand-side constraints are clear. They have difficulty in project formulation and communicating their ideas well, so that their projects are perceived to be bankable. As the supply chains between small-medium-large enterprises are yet to mature, the large enterprises, both public and private, invariably squeeze the small companies after taking supplies.

In spite of the Delayed Payment Act, delay and outright defaults by large companies are commonplace, increasing the financial vulnerability of small companies by reducing liquidity.

The maximum resistance encountered is at the time of birth of new enterprises. The problem is compounded because of unavailability of acceptable collateral, chiefly due to socio-economic reasons, as property is owned jointly by the family, with land and land reforms stuck in procedures for decades.

The problem is even greater when the entrepreneur is young or is a woman. There is near absence of seed/risk capital availability for start-ups.But even greater are the supply-side constraints, both stemming from policy and the operative environment. Competition in the banking and financial sector is a long way from maturity, as acknowledged by the finance minister while speaking on more autonomy for public sector banks. Bankers have largely failed to move away from the traditional collateral requirements as the main method of reducing risk.

What is amazing is the limited financial products on offer for the small sector, in comparison to consumer finance. There is inadequate knowledge of credit-risk assessment with bank staff, which they try to compensate by over-securitisation.