SME package: so far, so good

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: To double credit flow to small & medium enterprises (SMEs) in five years, the finance minister’s much-awaited policy package banks on transparency in the appr-aisal and rating system. And proposes initiatives to build institutional mechanisms, such as model appraisal and rating tools, a common data pool of risks in clusters, etc., making the whole process more objective.

Proposing corporate debt restructuring for SMEs is also interesting. All accounts, except those classified as ‘loss assets’ will be eligible for restructuring. The introduction of a ‘One Time Settlement’ scheme till March 31, 2006, would do a lot of good, in allowing banks and entrepreneurs rid themselves of deadwood, provided the approach remains liberal.

Initiatives such as telling banks to fund at least five micro and SMEs may be desirable, but not practical. Policy objectives could have been better achieved by assigning targets to banks at a regional level.

The crucial question is whether these initiatives are sufficient to double the growth of credit to the sector. If credit to the newly defined medium enter-prises (investment limit Rs 1-10 crore) is not included, the target looks untenable. Besides quantum, it is the spread of credit that dema-nds attention. Even after priority sector lending, bank credit has not been able to reach even 15% of registered SSI units! And unregistered units are 10 times the registered ones. Without radical financial sector reforms and infusion of competition in the sector, by allowing entry of large SME-dedicated foreign banks, it looks very difficult.