Independent India has seen the MSME sector grow by leaps and bounds and is proving to be the most promising and reliable sector for job creation and poverty alleviation in India. Despite an elaborate and dynamic policy framework, the road to the next level for MSMEs continues to be hindered largely due to the lack of adequate and timely credit.
Any collateral or third party guarantee free credit facilities extended by eligible institutions known as Member Lending Institutions (MLIs, at present 117 in total) with a maximum credit cap of Rs.10 million are eligible to be covered. The maximum guarantee cap is set at Rs.6.25 million or Rs.6.5 million. The extent of guarantee cover is 85% for micro enterprises for credit up to Rs.5 million. The coverage under CGS has made a record by covering 150,000 guarantee approvals in FY 2009-10, which was the highest so far in any single year. With this, the cumulative number of credit guarantees crossed the 300,000 mark on March 31st, 2010; covering an aggregate credit of Rs.115.51 billion, extended by 85 MLIs in 35 States/UTs. The corpus of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.19.06 billion to the corpus up to March 31, 2010. By the end of the 11th Plan, the corpus is to be raised to Rs.25 billion. Although the government has placed institutions and mechanisms to deliver financial help and other assistance to MSMEs, the implementation of these schemes needs to be monitored at the ground level. Unless the credit guarantee system is strengthened and streamlined, smaller units would continue to suffer neglect in accessing the much needed credit for both inception and expansion.
In India, the situation is further complicated by the fact that the preferred mode of finance is either self or other sources. According to the MSME Annual report 2009, more than 85% SMEs source finance either through the self-finance route or are unable to get funds, while only around 15% of the total approach financial institutions and non-institutions like moneylenders. Financial institutions like Industrial Development Bank of India (IDBI), SIDBI, Industrial Finance Corporation of India (IFCI), and other major public sector banks like SBI, Andhra Bank, Bank of Baroda and private banks like ICICI, Standard Chartered and others are providing financial assistance for commercialisation of domestic innovations and importing relevant technologies for growth. Small Industry Development Organization (SIDO) is another prominent government institution offering a number of financial services to SMEs. In addition to the above, government has recently emphasised on the importance of ‘credit rating scheme’ to help smoothen the loan facility process by banks and financial institutions for the SMEs. Under this scheme, the credit rating agencies assess a company’s credit worthiness and give it a rating which is widely accepted by banks and other financial institutions. This, in turn, facilitates hassle free flow of credit to SMEs, while enhancing the comfort-level of the lending banks. The other cherry on the cake is that the government reimburses 75% of the fees charged by the rating agency subject to a ceiling amount. T. R. Bajalia, Executive Director, IDBI Bank says, “Credit agencies have played a vital role as we welcome independent and reliable credit assessment. As credit agencies have done due diligence for an enterprise, it lessens our work and fastens the entire loan granting process.” Still, one of the largest problems in this is that most MSMEs are not aware about this credit rating facility. Outstanding credit to MSMEs has increased at a CAGR of 32.55% from 2005 to reach Rs.2.57 trillion. But total contribution of MSMEs to credit disbursal by financial institutions has improved very slightly from 8.8% in 2005 to 11.4% in 2009. So a more comprehensive information dissemination programme is a must to reach out to the others. Only 1.5 million of the 30 million odd MSMEs are in fact registered.
In India, the situation is further complicated by the fact that the preferred mode of finance is either self or other sources. According to the MSME Annual report 2009, more than 85% SMEs source finance either through the self-finance route or are unable to get funds, while only around 15% of the total approach financial institutions and non-institutions like moneylenders. Financial institutions like Industrial Development Bank of India (IDBI), SIDBI, Industrial Finance Corporation of India (IFCI), and other major public sector banks like SBI, Andhra Bank, Bank of Baroda and private banks like ICICI, Standard Chartered and others are providing financial assistance for commercialisation of domestic innovations and importing relevant technologies for growth. Small Industry Development Organization (SIDO) is another prominent government institution offering a number of financial services to SMEs. In addition to the above, government has recently emphasised on the importance of ‘credit rating scheme’ to help smoothen the loan facility process by banks and financial institutions for the SMEs. Under this scheme, the credit rating agencies assess a company’s credit worthiness and give it a rating which is widely accepted by banks and other financial institutions. This, in turn, facilitates hassle free flow of credit to SMEs, while enhancing the comfort-level of the lending banks. The other cherry on the cake is that the government reimburses 75% of the fees charged by the rating agency subject to a ceiling amount. T. R. Bajalia, Executive Director, IDBI Bank says, “Credit agencies have played a vital role as we welcome independent and reliable credit assessment. As credit agencies have done due diligence for an enterprise, it lessens our work and fastens the entire loan granting process.” Still, one of the largest problems in this is that most MSMEs are not aware about this credit rating facility. Outstanding credit to MSMEs has increased at a CAGR of 32.55% from 2005 to reach Rs.2.57 trillion. But total contribution of MSMEs to credit disbursal by financial institutions has improved very slightly from 8.8% in 2005 to 11.4% in 2009. So a more comprehensive information dissemination programme is a must to reach out to the others. Only 1.5 million of the 30 million odd MSMEs are in fact registered.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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