The Federation of Andhra Pradesh Chambers of Commerce and Industry (FAPCCI) organized a “Bankers Conclave on Energizing the MSME Sector - The Growth Engine of the Economy & Mega Loan Mela Up to Rs. 1. Cr” on March 09, 2013 at Federation House, Hyderabad. Dr. (Mrs.) J. Geeta Reddy Minister for Major Industries, Govt. of AP was the Chief Guest at the occasion.
Mr. B. A. Prabhakar, CMD, Andhra Bank, Mr. M. Bhagavantha Rao, Managing Director, State Bank of Hyderabad (SBH), Dr. Sanjay A Baru, Economist & Director IISS, Mr. Devendra Surana, President, FAPCCI, Mr. Srinivas Ayyadevara, Senior Vice President, FAPCCI, Mr. Hari Govind Prasad, Chairman, Banking Committee, FAPCCI and Mr. M.V. Rajeshwara Rao, Secretary General, FAPCCI were the other speakers.
Dr. (Smt.) J. Geetha Reddy, Minister for Major Industry said that - we are all well aware that the role of micro, small and medium enterprises (MSMEs) in the economic and social development of our country is well established. The MSME sector is a nursery of entrepreneurship, often driven by individual creativity and innovation. MSMEs are important for the national objectives of growth with equity and inclusion. The MSME sector contributes about 9 per cent of the country's GDP, 45 per cent of the manufactured output and 40 per cent of its exports. The MSMEs provide employment to over 73 million persons through more than 31 million enterprises with a lower labour to capital ratio and produces 6,000 products range from traditional to high tech items. The total production during 11the Five Year Plan was projected at Rs. 10,958 billion with growth of 11%. The GDP contribution is about 20%.
I happy to note that during the 12th FY Plan, the total production of MSMEs was projected to grow at 11.48%. MSME sector has been accorded high priority in the industrial policy owing to its vital role in the economy. During the 11th FYP, the total outstanding credit by banks to MSMEs in India stood at Rs 4,859.43 crs with CARG (Compound Annual Rate Growth) of 40% from 7th FYP to 11th FYP. Public and private banks registered at growth of 35.28% and 36.14% respectively.
I am happy to inform that during the recent budget speech of the Union Finance Minister have announced the following benefits to the MSME Sector.
Ø Benefits or preferences enjoyed by MSMEs will stay upto three years after they grow out of the category in which they obtained the benefit. The non-tax benefits may be made available to a MSME unit for three years after it graduates to a higher category.
Ø To enhance the refinancing capability of SIDBI from the current level of Rs 5,000 crore to Rs. 10,000 crore per year.
Ø Already allocated Rs. 100 crore to provide equity and quasi-equity to Micro Finance Institutions (MFI) Fund and another sum of 100 crore to the Fund in the budget.
Ø A corpus of Rs. 500 crore to SIDBI to set up a Credit Guarantee Fund for factoring.
Ø World Bank assistance, a sum of Rs 2,200 crore during the 12th Plan period to set up 15 additional Centres of Tool Rooms and Technology Development Centres set up by the Ministry of Micro, Small and Medium Enterprises.
Ø Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.
Although Indian MSMEs are bedrock for innovation and despite being a diverse and heterogeneous group they face some common challenges with regard to access to institutional credit, collateral requirements, equity capital, etc. In this background that the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was established with the objective of guaranteeing collateral and third party guarantee free credit facilities so as to enable enhanced flow of credit to the MSE sector in India. I was told that over the past 12 years, CGTMSE has been ably serving India's MSEs through the Credit Guarantee Scheme by providing guarantee cover to collateral and third party guarantee free credit facilities sanctioned by Member Lending Institutions (MLIs) to eligible MSEs. CGTMSE has extended guarantees for loans aggregating to over Rs.38,000 crore covering approximately 8 lakh MSEs as on March 31, 2012.
I am happy to note that many governments around the world also provide interest rate subsidies to SMEs. Under the subvention scheme, banks give credit to SMEs at lower interest rates (depending on the rate of subvention) in comparison to the market prevailing rates, which are then later reimbursed by the government. Interest-rate subsidies have the direct effect of reducing financing costs; indirectly, they have a beneficial effect on the demand for credit, investment and, ultimately, employment. However, like any public instrument, it may lead, macro- economically speaking, to an inefficient allocation of resources, with financial efficiency being defined as an allocation of resources to investment with the highest anticipated rate of return. This may in turn result in less profitable projects being undertaken or give rise to activities that the market would not have financed, etc. Let me share few examples according to a Report from the Commission to the Council and the European Parliament.
- In Germany, in 1999 the Special ERP (European Recovery Programme) Fund, which centralises the management of interest-rate subsidies on behalf of the State, granted loans amounting to EURO 6 billion for investment projects by SMEs totaling EURO 15 billion.
- In France, the interest-rate subsidy scheme administers loans amounting on average to EURO 1.5 billion a year and costs the State some EURO 250 million in subsidies.
- In Spain, interest-rate subsidies administered by the ICO (Instituti de Credito Oficial) under the ERDF (European Regional Development Fund) programmes for SMEs during the period 1994-99 totaled EURO 194.6 million in respect of loans totaling EURO 3.3 billion for investment projects costing some EUR6.1 billion.
4. In the United Kingdom, the Small Business Loan Scheme provided subsidies for loans totaling EURO 70 million
Credit guarantee schemes (CGSs) are set up, especially for the purpose of encouraging financial institutions to offer loans to small enterprises, on the understanding that a government or a semi-government institution will reimburse a major proportion of the loan (to the financial institution which provided the loan) should the firm default. During the last two decades there has been a major interest in credit guarantee schemes as a tool to promote the growth of the private sector in general and the growth sector in particular. I was told that there are about 2,250 credit guarantee schemes exist in almost 100 countries.
Most of the SMEs are relatively young and have little or no credit history to back their ideas. As such, lenders may also be reluctant to fund small firms with new and innovative products because of the difficulty inherent in evaluating the risks of such products. These difficulties may be grouped under classic information problems- problems pertaining to obtaining sufficient and relevant information about the parties involved in a financial transaction and these problems may, in effect, come in the way of otherwise creditworthy firms from obtaining credit.
If credit rationing affects the financial needs of SMEs (particularly long term loans for purposes such as capital expansion) significantly, a rationale exists for supporting small enterprises through government interventions / programs aimed at improving the access of credit to small business units. Also, the possibility of credit rationing is increased when banks insist on taking collateral from SMEs. Collateral acts a substitute for information and limits the downside loss for the lender
High transaction costs in relation to loan size in case of SMEs and start-ups are acknowledged to be a serious disincentive to bank lending as it is likely to reduce the profitability of this type of lending. Also, banks and financial institutions may be institutionally biased towards lending to large corporate. This may reflect prior relationships that the bank has had with the bank. Many countries around the world have therefore made Credit Guarantee Schemes (CGSs) a central part of their strategy to alleviate the financing constraints of SMEs. These schemes seek to expand lending to SMEs, sometimes focusing on specific regions or sectors by reducing lending risk. Specifically, a credit guarantee scheme is a risk transfer and risk diversification mechanism; it lowers the risk to the lender by substituting part of the risk of the counterparty by that of the issuer of the guarantee (the fund/ trust), which guarantees repayment of part of the loan upon a default event.
As far as Andhra Pradesh concerned, there are about 1,88,685 MSME’s with an investment of Rs. 33,811 Crores creating employment to 2,036,517 persons.
· Investment in MSME sector … Rs.33,811 Crores
· Employment Generated so far …. 20,36,517
· Production from MSMEs (approx.) … Rs.1,20,000 Crores/annum
· Exports from MSME (2010-11) … Rs.36,646 Crores
Government of Andhra Pradesh has initiated for establishment of a Credit Guarantee trust for supporting the SC / ST entrepreneurs to provide the collateral security for the projects while lending their term loan. However, as a national level policy matter, the RBI could not respond positively, however, APSFC has been permitted to sanction loans upto Rs 1.00 cr with out any security.
I strongly appeal to the Bankers to provide adequate guidance to the SMEs in the matter of identifying the financially viable projects and with the experience of the successful ventures, guide the MSMEs in the market tie-ups with the Large Industries. Todays the key Challenges of MSMEs include
Ø Lack of availability of adequate and timely credit
Ø High cost of credit
Ø Collateral requirements
Ø Limited access to equity capital
Ø Procurement of raw material at a competitive cost
Ø Problems of storage, designing, packaging and product display
Ø Lack of access to global markets
Ø Inadequate infrastructure facilities, including power, water, roads
Ø Low technology levels and lack of access to modern technology
Ø Lack of skilled manpower for manufacturing, services, marketing, etc
Ø Multiplicity of labour laws and complicated procedures associated with compliance of such laws
A collective effort is required to resolve these issues. I have already convened a meeting with all banks for effective implementation of the Credit Guarantee Fund Trust for MSME without insisting for the collateral security from the MSMEs which is already there upto Rs 1 crores term loan lending.
I wish that all the prospective MSMEs to study the scheme of Government of India, Ministry of MSME where number of schemes are formulated for Infrastructure Development, Common Facility Centres, Diagnosis study, Software Interventions, technology upgradation, market support etc. Let the MSMEs come up with specific scheme for promotion of MSME clusters in the state. Our Government is ready to develop exclusive SME clusters. Government of AP is already implementing the best IIPP-2010-15, where 100% , 50% and 25% VAT reimbursement for Small, Medium and large enterprises, Investment subsidy to SMEs upto Rs 15 lakhs and Rs 50 lakhs to SC/ST entrepreneurs.