Sushila Ravindranath | Published: Jul 14 2014, 02:03 IST
Bank funding for the sector has come down from 50% to 35% over the past few years, leading to dependence on non-formal lending
The small scale sector and the trading community had hoped that the Budget would address some of their long-standing problems. They require funds to stay alive, grow and expand. However, a major part of the community in the country has very little or no access to formal finance. IIM-Bangalore professor R Vaidyanathan points out in his recently published book, ‘India Uninc’, that the real India story, over generations, lies in the many proprietary and partnership firms, small manufacturing units, kirana stores, single entrepreneurs and household enterprises.
Crisil rates over 50,000 MSMEs in India—both in the manufacturing and services sectors. The National Commission on Enterprises in the Unorganized Sector (NCEUS) estimates that there are nearly 70-100 million small and micro businesses in the country. According to Crisil, the share of bank and institutional funding to MSMEs has been on a downward trend. At best, in certain segments such as pharma and engineering, this has remained stagnant. This sector’s dependence on non-formal creditors for external credit (such as suppliers, local money-lenders) in its total funding has increased from 50% to nearly 65% now.
What this means is that bank-funding for this sector has come down from 50% to 35% in the same period. MSMEs’ capital resources are limited to start with and the surpluses they generate in their operations are also low. Their profit margin is wafer-thin, at around 2-3%, as compared to the 8-9 % margins of the larger industries. This has led to most MSME units scaling down their already crunched operations. Most MSMEs depend on large units for their business. With the overall economy under strain, big industry has been passing the pressure on to them. The outstanding receivables from the large sector—in terms of number of days outstanding—for MSMEs has been increasing in the past five years. Across various sub-segments, it is up nearly 20%. This affects funds flow and makes MSMEs even more dependent on non-formal sources of finance.
Praveen Khandewal, National Secretary general of Confederation of All India Traders (CAIT), says that the over six crore (CAIT) members provide employment to nearly 25 crore people. Their annual turnover is around R20 lakh crore, contributing nearly 15% of the GDP. Their growth rate is 15% per annum. After agriculture, retail is the largest provider of employment. However, almost all small traders have stories to tell of how badly they are treated by the banks.
According to Census 2011, out of the 245 million households in the country, only 135 million households or 55% avail of any kind of banking services. Urban households number 65 million and the banking coverage in such areas is 70%. The coverage of banking is sharply lower in the rural/semi-urban areas. Out of the 180 million rural households, only 50% had access to any kind of banking services.
It is the unorganised sector—comprising crores of business and commercial units ranging from the corner grocery to the small truck operator to the vegetable shop to the auto mechanic to the small departmental store to the itinerant trader—which employs the largest portion of rest of the workforce, slightly more than 150 million.
A study by the International Finance Corporation shows that the commercial banking sector provides only about 10-15% of the recurring credit requirements of the MSME sector, which it estimates at R20 lakh crore at the lower end and R32 lakh crore at the higher end. Non-bank companies provide about 8-10% while at least 75% of the requirements are met from non-formal and non-organised sources.
Small retailers traders, wholesalers and people closely associated with the trade sector such as small transporters, farmers and workers always face a liquidity crunch. They have to arrange finances from their own sources, mainly friends and relatives, mortgage their assets and belongings and, as a last resort, turn to money-lenders. The interest rates the money lenders charge are almost 5% per month.
RBI is aware of the problems. Its latest annual report says that priority-sector lending—that is, identifying certain sectors such as small and micro businesses, agriculture, low income groups etc—has been a key policy tool with which the government has sought to reach the financially excluded sections. This policy has been in force for the last 45 years, whereby commercial banks are directed to earmark 40% of their credit portfolio to the identified priority sectors. Commercial banks may show the required numbers, but they have focused on those who are influential and those who they deem credit worthy.
The track record of the non-bank finance companies of the past decade in catering to this sector seems far better than banks. From just around 2-3% of the total share of the MSME credit market, non-bank companies have increased their share to nearly 10% of the total addressable market, nearly rivaling that of the formal commercial banking sector. However, NBFCs complain that most of RBI’s actions exclude NBFCs while considering inclusive growth. RBI has imposed stringent restrictions on NBFCs that it is difficult for them to finance the tiny sector or the small trader.
There is a lot of hope riding on this government to remove at least some of the hurdles confronting this sector. The PM has consistently talked about creating jobs. Genuine financial inclusion will be one way of doing it.