Small Is Still Not Beautiful For Banks

Updated: Apr 15 2004, 05:30am hrs
It is a sector which accounted for almost 40 per cent of the industrial value added and 34 per cent of the countrys total exports in 2002-03. Its 3.6 million units manufactured over 8,000 items and provided employment to about 20 million people. Yet, the small-scale industry (SSI) finds it difficult to raise funds from banks, most of which are directly or indirectly owned or controlled by the Union government, that otherwise set up a number of committees over the past decade or so to suggest measures for the growth of the sector.

It is not that the government does not realise the contribution of SSIs to the national economy and its potential and relevance in the future. Finance minister Jaswant Singh devoted a full paragraph in his last years budget speech to the need for passing on the benefits of declining interest rates to SSIs. The State Bank of India announced an interest rate band of 2 per cent above and below its prime lending rate for secured advances.

The Reserve Bank of India (RBI) constituted a working group of flow of credit to SSI sector under the chairmanship of its central board member A S Ganguly. Its mandate includes suggesting ways to improve credit flow to the SSI sector, particularly the tiny sector, and plans to extend micro finance coverage.

At the ground level, however, things are not too encouraging. The share of the SSI sector in the net bank credit outstanding has been falling. In March 2000, it was 14.20 per cent but came down to 11.10 per cent by March 2003. The SSI sector accounted for 36.12 per cent of the total priority sector lending in March 2000, which declined to 32.45 per cent in March 2001, 29.10 per cent in March 2002 and 26.1 per cent in March 2003.

A recent survey of SSIs by the Federation of Indian Chambers of Commerce and Industry (Ficci) reaffirms the difficulties faced by the sector when it comes to taking loans from banks. In fact, an overwhelming majority of 79 per cent of the respondents said it was difficult to obtain funds from banks. SSIs feel that banks do not consider them as valuable customers and this attitude is reflected in all stages from obtaining information to filing of documents to sanctioning and disbursement of loans, concluded the survey.

Competition from private sector has made public sector banks more professional and cautious while extending loans which may have contributed to their approach towards SSIs.

The only faint silver lining has been lowering of interest rates on loans to SSIs, but the finance ministers announcement in Budget-2003 that SSI units should be charged interest in the bank of 2 per cent above or below the prime lending rate is yet to be implemented in letter and spirit.

The Ficci survey points out that 17 per cent of the respondents were still paying interest rates in the range of 14-18 per cent while 51 per cent of the respondents were paying interest at the rate of 12-14 per cent.

Ficci says an analysis of the feedback from respondents brings out certain issues that need to be addressed immediately to improve credit flows. These include time-bound approvals of loan applications, transparency in sharing of information relating to credit appraisal, decentralisation of authority by giving more powers and bank branch levels, better collateral security norms, more publicity to various schemes and facilities provided by banks (majority of SSIs are unaware of collateral-free and composite loan schemes) and an increase in present composite loan limit from the present level of Rs 2.5 million.

To expedite loan sanctions and disbursals, the RBI could direct the banks to take a decision within four-five weeks, once all the documents have been filed by the applicant.

Banks are not proactive in guiding and counselling SSIs so that they can measure up to the benchmarks they need to achieve for becoming eligible to get loans. They should also inform the applicant the reasons due to which a loan is rejected so that the applicant can, the next time, apply for a loan after removing the anomalies.

The Ficci study highlights the need for RBI to evolve a set of specific guidelines for collateral security taken by banks against loans. At present, there are no formal guidelines from the central bank. The current collateral-free loan limit is Rs 5 lakh. As per the SSI charter of some banks, SSI units with good track record and financial position are eligible for collateral-free loans over Rs 5 lakh and up to Rs 15 lakh. The respondents in the Ficci survey say they are not benefiting from these provisions despite having a good track record, something which the RBI may like to look into. Some respondents also pointed out that the present composite limit of Rs 25 lakh for SSIs is inadequate and needs upward revision.

Then there are operational issues with banks which add to the sectors financial burden, says the survey. Some banks have started compounding interest charged on working capital loans on a monthly basis instead of quarterly basis. Processing fee is charged by the banks even on limits not sanctioned as it is required to be paid with the application.

Most bank branches do not have forex facility, a major headache for SSI exporters as they receive payments in foreign currency.

Banks tend to give a lot weightage to stock when computing maximum permissible bank finance. In todays highly competitive world, it affects units which have reduced stocks by implementing efficient inventory management systems but have greater bills receivables on their books.

A time series data analysis shows that eight million jobs were created in the SSI sector between 1980 and 1997 (an average annual increase of 5.1 per cent) while the organised sector generated only 54 lakh jobs during the same period. Time and again, industry bodies and committees set up by the government have reass-erted the potential of the SSI sector and its contribution to the national economy.

One hopes that RBIs AS Ganguly Committee will finally provide the answer to the financing problems of the sector.