It is estimated that nearly two-third of the eight million manufacturing micro, small and medium enterprises (MSMEs) in India are available in clusters, 95% being micro enterprises and two-third of those being the smallest of the micro enterprises. Simultaneously, finance related challenges are paramount among micro enterprises.?As per the Reserve Bank of India (RBI) guideline banks need to direct 60% of their advances to the micro-enterprises. In contrast, evidence from NCEUS (National Commission for Enterprises in the Unorganised Sector) 2009 shows that from August 2007 and 2008, credit for credit cards increased by 86.3%, all services sector by 35.3%, construction by 48.3%, real estate by 46.3%, whereas increase of credit for small scale industries (including micro enterprises) increased by just 9.7%.
Overall availability of credit to small and micro enterprises as percentage of net bank credit of the scheduled commercial banks has declined from 15.5% in 1996-97 to 6.6% in 2007-08. The lower segment of micro enterprises (with investment up to R5 lakh in plant and machinery) has experienced a decline from 2.2% to 1.6% in the same period.?While finance is an important need in clusters, need for the same are not uniform and are heterogeneous among the established as compared to the micro and the smallest of the micro units. Clearly need for the smallest of micro enterprises are more pronounced as compared to others.
Based on a sample survey of six MSME clusters it is found that MSMEs mostly begin their venture with self finance. Bank?credit is limited mostly to the bigger ones among the MSMEs. The smallest units suffer from lack of access to working capital (survival finance) as well as capital for expansion (expansion finance). Some of them even do not have a bank account as they deal with hard cash for business transactions. Most of the respondents of the smallest units revealed that banks are rigid to accommodate them as they do not have desired collateral. Their houses are not concrete/semi-concrete/ wooden and thus banks would not give a high loan amount for such houses. The turnaround time for disbursing the loan is too long and too much documents requested by the banks dampens the spirit of the micro enterprises.
The challenges faced by most of the respondents in the survey revealed that the high cost of borrowings have turned the smallest units seeking other local alternatives with high interest rates. These informal agents disburse money faster. The smallest units?need credit to mitigate long cycle payments.?There are also differences?between the felt credit need and the credit accessed by the banks.
Also apart from productive purposes, there is also a need to assess the household consumption requirement to enable the entrepreneurs/artisans improve their holding capacity to reach out to better market. Interestingly while they require finance, they also require simultaneously support for other business related issues. Order based finance can be a solution for this under which the purchase order can be used as collateral for the loan. Finance needs be given with insurance product for possible losses for damages or theft. The role of financial institutions is important for proper financial education. The role of local associations becomes very important here. The products need to specially consider this issue for certain clusters with seasonality.
In addition, the banking procedures need to be less rigid to accommodate the smallest enterprises. In order to accommodate this survival-finance need, there is more of a need for venture type financing as the banks consider this too risky. It should take into account the business operations including production cycle/cash flow, seasonality issues and other factor that influence the business.?Also growth finance is a major issue that takes shape with enhanced performance and opening up of avenues.
It is also observed that finance in many MSME clusters follows issues like quality, marketing, etc. Hence taking finance as the only product might not work. However, solutions to most of the problems need finance and therefore it is considered to be a derived demand. Thus, there is need to promote finance plus models in MSME clusters. Here the role of banking and the micro finance sector in conjunction with appropriate technical support institutions can be a good model to be tested out.
The author is a
Director, foundation for MSME clusters
