Two other basic issues also remain unresolved: equity and discipline. The sector operates in the debt market as it is driven by family-owned enterprises whose ability to distinguish between debt money and equity (constituting many a time less than 25% of total investment) is very limited.
Here comes the question of equity. Adverse selection due to asymmetrical information is to blame more than the moral hazard for the lagging performance of banks in this sector. The Credit Information Bureau is almost a non-starter. Risk mitigation on this count remains a fond hope.
Another major contributor to the problem has been the mindset of the lender. The drive from the top in the lending sector is on non-performing loans. Although guidelines provide for graduating a deteriorating asset into a superior one, there is no evidence of such efforts, save exceptions. Those who looked at NPAs with a sense of dedication have now reached positions of consequence and do not drive the creation of performing assets. The impasse in this sector, therefore, continues.
The other important factor, discipline, has also become an issue due to two main reasons. First, a good number of borrowers lack knowledge of financial management. Their attitude that giving some information that satisfies their immediate requirement often leads to information default. Each bank can now enthuse its SME borrowers to install PCs with the requisite licensed software to maintain their accounts and inventory management. Those who are computer-savvy can access the information online to decide on the borrowing limits. This would improve the speed of delivery and improve reliability of the information base.
Some banks claim to have separate cells and dedicated branches for the sector. Over 90% of these institutions tackle loans, with Sidbi being no exception, that carry limits of over Rs 25-50 lakh per unit. There is no evidence on record to show that such organisational intervention, initiated by the current Prime Minister in 1997 as finance minister has improved delivery channels for SME credit. Even banks have not adopted cash flow-based lending instead of balance sheet-based lending. In the backdrop of the securitisation Act, there is a strong case for all collateral-based lendings to go for an interest-quote of sub-PLR substantially. Banks can view this as an emerging sustainable portfolio. Venture capital, too, is a non-starter in the sector. There should be a conscious drive and effective monitoring of the recently initiated Sidbi Venture Capital Fund. Investors in this fund should lay clear guidelines.
The other question relates to equity. How can the sectors interests be bettered In China, there is a secondary capital market exclusively catering to SMEs, where the entry thresholds are lower than the corporates. It is time we prepared our SMEs to access equity markets, too. All manufacturing enterprises requiring capital investment of Rs 50 lakh and above for expansion could be allowed access to the equity markets. This requires a different set of rules and new set of relationships between large enterprises and SMEs.
Both as manufacturers of intermediary products and component manufacturers, SMEs will play a dominant role in the Indian manufacturing economy. With the spr-
ead of knowledge on clusterisation, there is a need for policy integration between the government and financing institutions on the one hand, and BDS providers and financing institutions on the other. It is also time inter-firm cooperation and strategic alliances are encouraged with effective financial intermediation by the lending institutions so that the sectors efficiencies to go global get enhanced.
The writer is managing director, Sandilya Consultants (P) Ltd., Hyderabad, and national expert, Unido