Anil Bhardwaj, secretary-general, the Federation of Small and Medium Enterprises (Fisme), believes creating dedicated financial institutions to fund start-ups of first generation entrepreneurs would go a long way in fostering MSME. Access to credit, he says, remains a major problem for the MSME sector. In an interview with FE?s Kakoly Chatterjee, Bhardwaj talks about the problems being faced by the micro, small and medium enterprises and their possible solutions. Excerpts:
What is the update on the SME sector in India?
Currently the MSME sector comprises around 26 million units. Around 70% of them are service enterprises. It is a hugely heterogeneous sector that encompasses every conceivable business activity. The major sub-sectors of the sector include food, textiles, engineering (using metals, plastics, chemicals, rubber etc), leather, telecom, machineries and machine components and pharmaceuticals. The sector is clocking a growth rate higher by two percentage points over the average industrial growth for years now. This trend is likely to continue for sometime.
What are the main sources of credit for this sector apart from Sidbi and NSIC? How helpful are the PSU banks?
MSME is mostly an informal sector with 94% of unregistered units and 97% of un-incorporated units operating under the umbrella. Access to adequate funding is a major problem in this sector. An RBI report shows that only 5% units in this sector has access to institutional funds. Even though lending to MSME is compulsory for commercial banks as part of priority sector lending (PSL), which is 40% of its total lending, they are not given a fixed target for disbursal to this sector like in agriculture (18%).
The present financial flows are hugely inadequate and the fact has been brought out by studies and reports commissioned by government and RBI from time to time. Sidbi takes up the role of refinancing from time to time and NSIC is a small, niche player. Keeping in view the size of the sector?s demand, their impact has been rather modest. MSMEs not only face difficulty in obtaining funds they also suffer from the poor quality of service, lack of transparency in costing and deficient domain knowledge of bankers.
Do you think compulsory lending should be introduced in this sector?
Fisme believes that forced lending is not going to give greater access to credit to the MSME sector. We do not demand cheaper credit, but we ask for timely and adequate credit, even it is expensive. We feel deeper structural reforms are needed in the financial sector to ensure that banks are encouraged to take greater, though calculated, risk. I think, at the same time, new types of institutions are needed to serve smaller first-generation entrepreneurs. There is a missing middle-level institutional set-up below the current banking structure that can connect with entrepreneurs and can serve them better, though not necessarily a cheaper route.
Are financial institutions being encouraged to refinance loans that SMEs may have taken from non-institutional sources like money lenders?
PSU banks are trying indeed, but as I said, there are both structural and institutional limitations to make a perceptible change happen on the ground. More needs to be done in this area.
Do you think SEZs exclusively for SMEs will boost this sector?
Access to industrial space has become unattainable for MSMEs. The exorbitant cost of land is now a major handicap in conceiving viable greenfield MSME projects. Unlike the MSME sector, for bigger industries the cost of land and building is small. But for MSMEs it often exceeds the cost of the entire plant and machinery—the productive asset. As a result we need major policy changes so that MSMEs can obtain access to affordable industrial space in SEZs, freight corridors and other such new mega projects. Electricity also continues to pull down productivity as viable models for collective distribution of electricity have not yet emerged because of policy apathy.
We have suggested provision of ready infrastructure, such as industrial sheds with support infrastructure in ?plug & play? fashion, on rent and lease. Without such initiatives competitive manufacturing in India would be increasingly difficult, especially in small scale.
SMEs are often unable to market their products owing to financial constraints. Do you plan to provide a marketing platform for their products?
Currently there are two important issues for MSMEs: access to competitively priced and adequate inputs; and access to markets. While primary efforts are of the entrepreneur, we have been complimenting their efforts by working in three areas to enhance their market access. The first dimension is our working on market access through bilateral and multilateral trade agreements in international trade. This includes working on standards and compliance-related issues. Secondly, we have been advocating a set-aside target of 20% in public procurement. The PM’s task force has endorsed this and we are hopeful of some headway soon in this regard. This can open up a market of over Rs 25,000 crore. Thirdly, we are currently focused on ensuring MSMEs? access to the emerging business, worth Rs 500,000 crore in ten years, of defence and aerospace off-sets. (In February, Fisme with NSIC, is holding an international event in Hyderabad to facilitate joint ventures and partnerships for exploiting defence offsets between Indian MSMEs and foreign defence suppliers).
The PM?s task force on MSME says the government should step in with viability gap funding to encourage private participation in developing infrastructure for the sector. What is your take on that?
We are skeptical of the very concept of viability gap funding, especially in infrastructure projects. It is leading to all kinds of questionable practices. (First people will try to get the project by understating the gap, crowding out genuine bidders and after winning the bid, make requisition for a change in conditions.) Hard infrastructure that is needed but cannot be created by MSMEs on their own include industrial estates with access roads, electricity and common affluent treatment mechanisms.
The task force has also suggested modifications in the capital subsidy scheme to expand the sector. What exactly is needed here?
Capital subsidy scheme is one of the popular schemes. Its outlay remains very small though, and the process restrictive. The process of approval as to whether the technology is indeed leading to upgradation should be at best be left to the banker and the entrepreneur. The ?positive list? of technology and of products should be replaced with a small ?negative list?.
