Speeches

Excerpts from the speech delivered by Kishori Udeshi, Chairman, BCSBI at the conference on 
‘Facilitating Bank Finance to Micro & Small Enterprises : Implementation of the 
new Code of Bank’s Commitment to MSEs’ organised by the PHD Chamber of Commerce & 
Industry at New Delhi on August 21, 2008.

At the outset, let me convey my thanks to the PHD Chamber of Commerce and Industry for organising this conference on a subject which is not only topical but of immense importance to the national agenda of growth and development. My thanks are also due because it enables the Banking Codes and Standards Board of India (BCSBI) to spread awareness and bring to focus the new Code of Bank’s Commitment to Micro and Small Enterprises evolved by the BCSBI in collaboration with the Indian Banks’ Association.

               Coming back to the Indian scenario, if the share of bank finance to SMEs was the lowest when the economy was buoyant at 8.9% and inflation at 6.7% then in the current scenario of double digit inflation, deceleration in growth, socio political tensions and a tighter monetary policy regime, there is definitely cause for concern about the availability of bank finance to MSEs. However, there are signs of silver linings, in as much as a few banks, from the public sector, private and foreign have started focusing on SMEs, by way of setting up dedicated SME development centres (Corporation Bank) expanding factoring services to cover SMEs in certain sectors (ICICI) and entering into agreements with Industry Associations for reaching out to SMEs for meeting their working capital needs and growth plans.

While actions taken by these few banks are commendable and worthy of emulation, ab-initio, these exclude micro enterprises and it remains to be seen how much of these will be targeted to meet the requirements of the small enterprises. There are, on the other hand, shining examples such as the one in Karnataka where a bank has taken the initiative to help rag-pickers to become successful entrepreneurs. Or, e.g. the bank in Kerala where it is actively involved in forming SHGs, developing entrepreneurship skills and successfully financing the growth of MSEs. These are Grameen banks, sponsored by scheduled commercial banks. What is, therefore, the need of the hour is to encourage Grameen Banks to increase their efforts manifold and bring about a groundswell of change in the mindset of their sponsor banks and other scheduled commercial banks dealing with MSEs. Banks have, no doubt, through the Code of Bank’s Commitment to MSEs, voluntarily committed to their MSE customers to provide easy, speedy and transparent access to banking services in their day-to-day operation and in times of financial difficulty. For translating this into action at the grass-roots level banks must necessarily have staff trained not only in finance and banking but should be trained and sensitised through customised training programmes to meet the diverse needs of MSEs such as knowledge of markets, both domestic and global, (lack of which is a major cause of sickness in MSEs) use of technology etc. Banks should be actively providing advisory and planning services and in fact hand-holding their clients through the setting-up stage and such services should be extended to all regardless of the size of their turnover.

Both, the Government and the RBI have been stressing upon the need for banks not to insist on collateral for providing finance to MSEs for loans upto Rs.25 lakhs. The Credit Guarantee Fund Trust for MSEs set up by the Government of India and SIDBI provides guarantee support upto Rs.50 lakh per borrower to banks for both term credit and working capital credit sanctioned to MSEs without obtaining any collateral or third party guarantee. If banks really know their customers as they ought to and develop a working relationship with their MSE customer, and generally keep tabs as a banker ought to, there is no reason for insistence on collateral for small loans upto Rs.25 lakhs especially when the Government gives a guarantee and the RBI has laid down strict rules defining wilful default. Not only will RBI publish the names of such wilful defaulters but also ensure that no additional facilities are available to such defaulters and in addition, entrepreneurs / promoters of companies which have been identified for siphoning / diversion of funds, misrepresentation, falsifications of accounts and fraudulent transaction would be debarred from institutional finance for floating new ventures for a period of five years.

While banks need to ensure responsible lending on commercial lines, their credit assessment, at the set-up stage, should emulate the international example as exists in Thailand and Vietnam which is based on the prospect of the survival of the unit rather than the unit’s profitability.

The Report of the Working Group on Rehabilitation of sick SMEs states that there is a perceptible decline of 10% in the number of sick SSI units in the year 2007 but the amount outstanding is up by almost 6% as compared with 2006 figures. Further, in the small enterprises sector, out of 1,14,132 sick units, only 3.76% units were found viable by the banks and out of these only 13.72% units were put under nursing. (i.e. only 0.52% of the sick SSI units were put under nursing). Banks can actively prevent sickness if they diligently do three simple things:

1. Have an efficient monitoring set-up not just an Annual Review. Banks are known to not verify stock inventories – which is one of the main causes for not diagnosing sickness early.

2. Maintain continuous interaction with their MSE clients.

3. Set-up credit counseling services urgently. This would help nip sickness at the early stages of the financial problems of clients.

Banks may think that all this requires more staff – but this is not the direction in which banks should look – they need to re-engineer their business processes by leveraging technology and innovating suitable financial products.

MSEs, on their part, should understand that banks are responsible to their depositors and shareholders and, therefore, they, i.e. the MSEs, as customers of bank credit, have certain obligations to fulfill by way of repaying bank loans, having appropriate accounting standards, maintaining proper books of accounts, submitting information correctly and more importantly sharing information about financial problems when these arise so that they can work together with the bank in resolving these.

It is in the interest of MSEs, to get themselves registered by independent rating agencies, such as SMERA as it could enable them to negotiate with their bankers for interest rate reduction, larger loan size or even obtain faster processing of their loan applications etc.

MSEs need to be aware that if they default and their credit history is poor they will find it difficult to access bank finance, as banks have been mandated by RBI to pass on all credit history of their clients to CIBIL or any other bureau registered by RBI.

MSME Associations and Chambers of Commerce too have a role to play in stepping up credit to this segment. They need to proactively engage themselves in:

1. spreading awareness of the Government Schemes and Code of Bank’s Commitment to MSEs among the general public. Incidentally, the Code of Bank’s Commitment to MSEs has been translated into eleven regional languages and these are available on the BCSBI website “www.bcsbi.org.in”

2. organising workshops and training programmes for their members to enlighten them about cash flow cycles, various financial products, accounting practices, etc. It is understood that the National Institute of Design, Ahmedabad has created an outreach programme for MSEs through which they deliver staff training courses on design and engineering to professionals employed by SMEs. On the same analogy programmes could be organized by the MSME Associations, Chambers of Commerce etc. through NIBM or any other training institute with the assistance of RBI, banks or SIDBI in the area of banking and finance, basic accountancy and information technology for MSEs.

3. senior-level representatives of SME/SSI Associations in each State are members of the Empowered Committee set up by RBI at each of its Regional Offices, of which the SLBC convenor, representatives of banks having predominant share in SME financing in the State, SIDBI, Director of Industries of the State Government etc. are also members. MSE Associations need to use this Forum not only for removing bottlenecks in the smooth flow of credit to the sector but also for reviewing the accessibility of bank finance to more and more MSEs but also highlight gaps if any in the attitude and skills at the bank branch level.

4. lastly, Associations should reflect upon whether the existing IBA prescription for bank lending to be within a band of 2% above and below the PRL for advances to MSMEs is working in the interests of their members. Anecdotal evidence exists to prove that what irks MSMEs in inaccessibility, inadequacy and un-timeliness of credit and not cost of credit per se. This is a critical issue and it is for MSEs and their Associations and Chambers of Commerce to take a bold initiative in the matter.

The Asia Pacific Region has recognised that the SME sector presents an opportunity to harness local competitive advantage for achieving global dominance. In India, although the small scale sector has remained high on the agenda of the Government since independence, lack of basic infrastructure uninterrupted such as power supply and a dedicated stock exchange for SMEs have hindered their growth. Banks too have yet to recognise the vast potential that exists in responsible lending to the MSE segment. Ultimately, there is always a limit to how much regulation can do. Therefore, it becomes all the mere important to ensure that banks deliver on their voluntary commitments enshrined in the Code.

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