The fund-starved micro, small and medium enterprises (MSMEs) may expect some relief if the government implements the suggestion of the National Commission for Enterprises in the Unorganised Sector (NCEUS) to earmark 12% of net bank credit under the total priority sector lending target of 40% for this sector.
Interestingly, the ministry concerned also recommended a 15% target for lending to MSMEs with the priority sector last year. But talks between the Reserve Bank of India (RBI), the finance ministry and the MSME ministry remained inconclusive.
The Raghuram Rajan Committee, in its report on financial sector reforms, has also called for a revision of the priority sector lending target in favour of the weaker section of the society.
MSMEs, which employ 42 million people and contribute 9% of country?s GDP and 40% of exports, have been complaining of problems in getting loans from financial institutions. The global credit crunch, which hit India in the middle of September last year, has worsened the situation for MSMEs that are usually not considered creditworthy by financial institutions.
As per the latest RBI figures, between April 1, 2008, and February 25, 2009, scheduled commercial banks disbursed Rs 62,580 crore to MSMEs, a 35.4% growth over the previous year. The credit growth to this segment was 67.4% in the same period of the previous financial year at Rs 71,182 crore.
Sensing this, the government announced various measures that include a 4% Cenvat cut for MSMEs, 2% interest subsidy, advisory to the central public sector enterprises to ensure prompt payment of bills of MSMEs and refinance facility of Rs 7,000 crore to the Small Industries Development Bank of India.
?Despite many committees and interventions in the realm of policy and institutional framework by the government, no perceptible improvement had taken place with regard to the credit flow to enterprises belonging to the unorganised sector. In fact, there has been a decline in credit flows to the segment,? NCEUS said in its final report, which was submitted to the Prime Minister Manmohan Singh on April 30.
Under the 12% priority sector lending quota, the NCEUS has suggested a breakup of 5% for small enterprises, 3% for medium enterprises and the rest for micro firms.
In order to ensure compliance with priority sector lending norms, the RBI should ask banks to deposit the unspent money in the proposed National Fund for the Unorganised Sector (NAFUS), a special fund for which the MSME ministry has started a consultation process with various other ministries.
Even under the present RBI guidelines on priority sector lending, which earmark 18% of net bank credit for agriculture and 10% for weaker sections including MSMEs, only 15 out of 27 public sector banks and 17 out of 23 private sector banks have met the targets.
Treating MSMEs at par with the farm sector, the commission has also recommended bringing down of the interest rates on loans upto Rs 5 lakh to 7% from more than 13% at present. The RBI has suggested a 7% interest rate for short-term loans for farming purposes.