The third quarter review of the RBI governor and the stay-put of rates leave micro, small and medium enterprises (MSMEs) in the lurch. The February 2 review meeting of banks convened at the instance of the Union ministry of MSME, calling for a credit flow of Rs 62,000 crore for the sector against a mere Rs 10,156 crore between December ’07 and December ?08, would at best be like an election manifesto with lofty promises. Is it that there is no demand for credit in the MSME sector or that the supply has shrunk with the fear of a huge NPA-prospect in the wake of a global recession? How far has the domestic demand been impacted on account of the global recession? Are the MSMEs operating more in the export-led demand or domestic-market led demand? Has the rate-cut indicator of the monetary policy measure thus far shown any positive impact on the cost of credit to this sector?

Had the commitments announced in The Indian Banks Association in its Circular 270/08 dated December 16, 2008, been implemented, the quarter should not have shown the low credit flow for the sector. Some of the measures for the MSME sector are worthy of recall.

Public sector banks will grant need-based adhoc working capital demand.

Loans up to 20% of the existing fund-based limits in respect of units having overall fund-based credit facility up to Rs 10 crore. The loan will be repayable in one year with a provision of moratorium of six months, during which only interest will have to be serviced.

Reduction in interest rates by 100 basis points, extended moratorium period, restructuring and rephrasing of loans, reduction in margins on receivables, blocked receivable to get extension for six months were all the additional measures proposed. Banks promised to be proactive in enhancing working capital limits where required.

In November 2008, the credit guarantee scheme for micro and small enterprises (CGTMSE) has extended the guarantee cover up to 85% for loans up to Rs 5 lakh for primary lending institutions and the ceilings of guarantee cover enhanced on collateralised lending up to Rs 1 crore and non-collateralised lending up to Rs 50 lakh.

On top of this, RBI is supposed to review the flow of credit to this sector through the empowered committees on a continuing basis. These reviews, like many others, seemed to have fallen on the wayside.

RBI obviously could not influence the banks to lend to this perennially credit-starved sector significantly at the regional level. In fact, in the wake of the global recession, in the months of November and December 2008, several SSI Associations and the State Bank of India held regional meetings to examine the impact. These also seemed to have also resulted only in lofty eloquence and little action.

No doubt, there is erosion in the net margins of the banks. But if we see the interest-rate structure of public sector, private sector and foreign banks published in the third quarter review of the monetary policy, it gives an appalling picture:

The latest position, if the IBA Circular mentioned is any indication, 50 basis points may have been reduced for the sector from the September 2008 position. From what was observed in the field, there are hardly any MSEs that received working capital loans at less than 13-14% per annum.

All the miscellaneous expenses have also gone up substantially, adding to the overall cost of credit for MSEs.

Low credit penetration in the sector is attributed by banks to overall deceleration in the manufacturing sector – IIP at 3.9% in April-Nov 2008, compared with 9.2% during the corresponding period last year and to the consequent fear of NPAs.

What has been the effect of RBI lowering the risk weights for lending to this sector and to the relaxation in the definition of NPAs? Precious little. It is worthwhile recalling that 60% of the MSMEs operate in domestic markets and the demand in domestic markets has not decelerated.

SMEs are the emerging economic force to drive the growth of the manufacturing sector, both qualitatively and quantitatively and this fact has been acknowledged over and over again by the National Manufacturing Competition Council: ?The small scale sector should be encouraged as breeding grounds for innovation and technology development, where it becomes the technology sources for larger companies. Towards this, the government must incentivise technology development in SMEs to enhance competitiveness. What is needed is focussed assistance (aimed at improving quality, productivity and resources) to the tiny component of the small enterprises engaged in manufacturing.?

All this clearly indicates that the monitoring mechanism of RBI for lending to this sector would need immediate correction without having to get into micro-management.

?The author is an economist and international SME consultant and regional director, PRMIA-Hyderabad Chapter