Of all the elements that go into a business, credit is perhaps the most crucial. The best of plans can come to naught if adequate finance is not available at the right time. MSMEs need credit support not only for running the enterprise & operational requirements but also for diversification, modernisation/ upgradation of facilities, capacity, expansion etc. In respect of MSMEs, the problem of credit becomes all the more critical when ever any episodic event occurs such as a large order, rejection of consignment, inordinate delay in payment etc. In general, MSMEs operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit.
Government of India recognised the need for a focused credit policy for MSMEs in the early days of promotion of MSMEs. This in turn led to a credit policy with the following components:-
Priority Sector Lending: Credit to the small scale sector is ensured as part of the priority sector lending by banks. Banks are required to compulsary ensure that defined percentage (currently 40%) of their overall lending is made to priority sectors as classified by Government. These sectors include agriculture, small industries, export etc. The inclusion of small industries in this list makes them eligible for this earmarked credit.
Institutional Arrangement: Small Industries Development Bank of India ( SIDBI ) was set up as the apex refinance bank. Term loans are provided by State Financial Corporations (SFCs) and Scheduled Banks. Credit lending in direct/indirect forms is also undertaken to some extent by NABARD , NSIC etc.
With the liberalisation of the Indian economy, greater emphasis was placed on meeting the credit needs of MSMEs. This was manifest through the following initiatives:-
The Comprehensive Policy Package announced on 30th August 2000 took this process further. This included:-
Many of these initiatives were based on the recommendations made by the Nayak Committee, the Kapur Committee and the Dr. S.P. Gupta Study Group.
Credit to MSME Sector From Public Sector Banks
The table below gives the status of credit flow to Village & Small Industries (VSI) Sector since 1991:-
The Table below give the status of credit flow to Tiny Sector since 1995:-
* Refers to units
with investment in P&M upto Rs. 5 lakhs.
assistance to MSMEs by SFCs
The main objective of State Financial Corporations(SFCs) is to meet
Term Loan/Fixed Capital needs of the Small Scale Industries. There are
18 SFCs in the country.
Source: IDBI Annual Report
Improving the Credit Flow
Nayak Committee (1991-92)
Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came in September 1992) dealt with aspects of adequacy and timeliness of credit to MSMEs. Nayak Committee found that small scale sector was getting working capital to the extent of 8.1% of its annual output which was less than the normative requirement of 20%. Accordingly, Nayak Committee recommended that the MSME sector should obtain 20% of its annual projected turnover by way of working capital. Based on these, as well as other recommendations of the Nayak Committee, RBI issued a number of guidelines advising the banks to grant working capital to the extent of 20% of the projected annual turnover, timely disposal of loan applications and setting up of specialised bank branches for MSME loaning in areas of higher MSME concentration. This norm is applicable to units with annual turnover up to Rs. 5 crores.
Seven Point Action Plan (1995-96)
As a follow up of Nayak Committee recommendations, the Union Finance Minister in the Budget Speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector. This included:-
Action has been taken by banks on the above action plan.
Kapur Committee (1997-98)
Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee headed by Shri S.L. Kapur, the then Member, Board for Industrial & Financial Reconstruction (BIFR), to review inter-alia:
Other steps taken by Reserve Bank of India to improve credit flow to MSME Sector
Incorporating credit requirement in the identified clusters in the banks’ Annual Credit Plans for the year 2003- 04:
As a follow up to the decisions of Review Meeting, the Ministry of MSME had forwarded to the RBI a list of 60 identified clusters for focused development of MSMEs to disseminate the information to all public sector banks. As per RBI’s directives, all SLBC Convenor Banks to initiate action for incorporating the credit requirements in the State Credit Annual Plans in respect of 60 clusters identified by the Ministry of MSME for focused development of MSMEs. Further, as decided in the meeting of the Standing Advisory Committee held at RBI, Mumbai on 1st September, 2003, the banks have been advised by the RBI that credit requirement in the identified clusters to be incorporated in the banks’ Annual Credit Plans for the year 2003-04.
Adequate publicity by the banks to various schemes/ facilities like availability of collateral- free/composite loan:
As decided in the meeting of Standing Advisory Committee held on 1st September, 2003, the banks have to give adequate publicity to their schemes/facilities like availability of collateral free /composite loans and schemes under TUFs/NEF/KVIC/CGTSI etc.
Interest rate band of 2% above and below PLR:
As per the announcement made by the Hon’ble Finance Minister in the Union Budget 2003-04, Indian Banks’ Association (IBA) has advised the banks to adopt the interest rate band of 2% above and below their prime lending rates (PLRs) for advances to MSME