Clearing the credit channels

Written by fe Bureau | Updated: Jun 27 2009, 01:20am hrs
Credit flow to the small & medium enterprises (SME) as well as measures for rehabilitation/nursing of sick SME units-through mobilisation of additional capital through alternative routes such as equity participation, venture financing-may well receive a boost when the working group recommendations are implemented. The working group, headed by KC Chakrabarty, chairman & managing director of Punjab National Bank, had submitted its report to the government earlier this year.

The report, drawn up after wide-ranging discussions with the stakeholders, namely, industry associations, government agencies and banks, emphasised the use of support schemes such as credit-linked capital subsidy scheme in the case of units in other (than rural) areas, KVIC margin money scheme (for units in rural areas) may be extended for rehabilitation packages to ensure proper restructuring.

The working group also wanted more effective state government intervention in the rehabilitation efforts. A recommendation made in this regard was the need for introduction of a single window concept in the states for providing relief and concessions to sick micro & small enterprises (MSEs).

In a bid to provide incentive to the banks to take rehabilitation measures, the committee recommended that repayment of any additional exposure taken as part of the rehabilitation package should be given priority on the cash flows as well as security as compared to other debt.

The terms of the loan were also to be eased by including the interest of at least six months after commercial production as a part of the project cost. Sufficient moratorium of say, two years, for repayment of the principal was also recommended to prevent cases of incipient sickness at the commencement of production and help units to establish themselves in the market in the beginning.

The committee also recommended that medium enterprises should be taken out of the purview of BIFR and the banks given the responsibility of their rehabilitation, because only a fraction of the medium enterprises are covered under Sick Industries Companies (Special Provisions) Act, 1985 (Sica) and their rehabilitation done under the supervision of BIFR.

Among the other steps suggested were that of raising the limit of Lok Adalats from Rs 20 lakh to Rs 50 lakh, measures to strengthen the DRT/legal machinery, dedicated bench for SMEs to expedite the process of recovery, and the setting up of asset reconstruction companies, especially for micro, small & medium enterprise (MSME) loans. Implementing the recommendations will now hopefully reduce the considerable delay in rehabilitation/nursing of the potentially viable units as one of the major reasons for delay in rehabilitation/nursing was the promoters ability to bring in their contribution.

The flow of credit to SME units has become a matter of concern in recent years. Though there is an increase in credit to small enterprises sector in absolute terms the percentage of small enterprises credit to GBC for scheduled commercial banks has come down significantly from 12.6% to 6.3% between 1997-97 and 2006-07. The situation is alarming when it comes to tiny sector. Share of credit to enterprises having investment up to Rs 5 lakh in plant and machinery as a percentage of SSI credit has declined from 23.3% in 2002-03 to 17.1% in 2005-06. When compared with gross bank credit these advances show a decline from 3.7% to 2.4%. Advances to micro enterprises have declined from 44.8% in 2002-03 to 34.50% of small enterprises credit in 2005-06. This is against the RBI stipulated level of 60%.

The recent trends only add to the gross inequities in the availability of credit to the SMEs. In fact, the third census of small enterprises conducted during 2001-02 indicated that as much as 95.5% of the small enterprises sector received no credit from the banking sector. However it should also be noted that the high rate of NPAs in small enterprises sector has created risk aversion among lenders, which has hindered increase in flow of credit to the sector. Though NPA in small enterprises have declined by 75%, they still stand at double the NPA level in total advances as on end March 2007. In absolute terms almost Rs 6,000 crore of PS banks are blocked in small enterprises NPAs.

Apart from these there are other factors like the lack of transparency in accounts of small enterprises as their accounts are not based on accounting standards and generally accepted accounting principles. Non-maintenance of proper records by MSMEs is also a problem indicated by the banks during interactions. Given this scenario, it is indeed difficult for the banks to assess the capacity of the enterprise to repay.

Perceptions about the requirements for accelerating growth in the SME sector also vary. The SME unit owners vouch for measures like organised marketing efforts, availability of proper infrastructure, technological up gradation, skill development and training/ advisory services. The banks are, however, of the opinion that the technological up gradation would contribute the most in the growth of the sector. Reduction in the cost of the loans for improving the flow of funds to the sector is another step where most stakeholders have a consensus.

But many hurdles are to be crossed before this can be pushed through. As noted in the report the banks have started paying more attention to the rating of SMEs under the new Basel II framework. The banks increasingly use a risk-sensitive approach when calculating the price of a loan. However, lack of transparency in the financial data and the inherent weakness of small enterprises make the process of rating difficult. As already identified, complicated procedures lead to delay in sanction by banks. So the broad thinking is that risk rating may further complicate and therefore delay the process of sanction.

The report notes that while rating serves a laudable objective, and is likely to become more popular and practiced in the near future, for smaller loans, that is, micro enterprises and the smaller small enterprises (say having total credit facilities of Rs 2 crore) scoring models may be encouraged as it is faster, simpler and makes less use of data. The suggestion is for two models for score based lending. For micro enterprises, a simple scoring model with basic information is the preferred way to decide the pricing as also the yes-no decision on financing, a more detailed scoring model may be utilised for small enterprises requiring upto Rs 2 crore credit facilities from the system.

The committee also said that each lending institution may develop its own scoring models based on its own perception of the importance of different parameters. Development of such models is expected to help the banks capacity to manage and control losses. It is pertinent to note that Basel II norms permit use of scoring models for loans up to Rs 5 crore.