The Hindu : Business : SSI financing: RBI policy lacks focus

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Monday, May 09, 2005

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SSI financing: RBI policy lacks focus

New initiatives likely to breed inertia rather than dynamism in SIDBI

Beyond the theory of `collective efficiency', it has become fashionable for governments to focus on clusters, specifically for the "convenience'' attached to it. Now the central bank also has started thinking in terms of "convenience,'' says P. M. Mathew.

SOME OF the key areas relating to Credit Delivery Mechanisms addressed by the Annual Policy Statement of the Reserve Bank of India for 2005-06 are agricultural credit, micro finance, SSI credit, credit to medium enterprises and priority sector lending. The discussion under these areas echoes the pronouncements by the Union Finance Ministry through the Budget and several other policy statements.

There is evidence to suggest that the globalisation era has witnessed a constellation of factors which led to the closure of a large number of small scale units. The percentage of working units declined from 62.75 per cent in 1987-88, to 60.77 per cent in 2001-02. Another important finding of the Census is a significant move towards service industries as against manufacturing activities. While nurturing autonomous enterprises was the policy thrust during the pre-liberalisation period, the recent growth experience demands a major support system for small and medium enterprises.

Against this background, the question that arises is whether the initiatives announced will deal with the core issues in these areas in a meaningful manner. Take for instance, the proposed mode of SSI financing. Under a scheme to be drawn up by the RBI, banks will be encouraged to establish mechanisms for better co-ordination between their branches and branches of the Small Industries Development Bank of India (SIDBI) located in 50 clusters identified by the Union Ministry of Small Scale Industries. Under this "strategic alliance,'' the existing branches of SIDBI, redesignated as "Small Enterprises Financial Centres''(SEFCs), will take up co-financing of term loan requirements of SSI units along with the bank branches, while the working capital needs will be met by the banks.

SIDBI's expertise in appraisal of credit needs is to be made available to banks on payment of a "nominal fee.'' The services of SEFCs will also be made available to tiny industrial units. The RBI will explore modalities to meet the growing financial needs for technology upgradation. A simplified debt restructuring and rehabilitation mechanism is also being considered for the sector, according to the policy statement.

What is the logical basis for the above policy pronouncements? They assume that the focus of directed credit and SSI financing is going to be increasingly cluster-focused. Beyond the theory of `collective efficiency', it has become fashionable for governments to focus on clusters, specifically for the "convenience'' attached to it. Now the central bank also has started thinking in terms of "convenience.'' Even if one is able to rationalise it, there is the question of feasibility of the proposed strategic alliance in the form of SCFCs.

SIDBI is envisaged as the nodal agency and the repository of "expertise.'' But is there any conscious effort to maintain the status of SIDBI as an expert apex bank for the small sector? The answer is unfortunately `No.' In his Budget speeches every year, the Finance Minister speaks of empowering SIDBI. However, SIDBI is being increasingly reduced to the status of just a commercial bank. The P&D (Planning and Development) allocation of the SIDBI, though enhanced from 0.54 per cent of its assistance portfolio in 2002-03 to 1.83 per cent in 2003-04, is still small. It is the P & D activities that provide the nutrient for SIDBI to function as an expert bank for the SSI sector.

On top of this, there is the factor of controlling this bank through a commercial banking culture, by putting ex-public sector bank officials in the top positions. The old cadre of experienced officials, groomed in the IDBI and SIDBI since inception, have got increasingly disillusioned. On the refinancing front, the commercial banks do not bother to care for SIDBI seriously. Considering these realities, the proposed new mode of SSI financing is not likely to make any qualitative improvement in the existing order of things.

The Nayak Committee Report was the most comprehensive report to suggest several practical measures for enhancing credit flow to the SSI sector. The Abid Hussain Committee and the S. P. Gupta Committee have provided extensive review of the existing system and developmental imperatives of the small sector. The deliberations and recommendations of these committees are adequate for the central bank to come out with a comprehensive credit policy for this sector. But unlike its counterparts, the Federal Reserve System and the Bank of England, why does the RBI remain so reserved in its approach to the SSI sector and to the priority sectors?

The central banks in most countries have grown out of the traditional twin objectives of price stability and growth, and discuss increasingly, issues of employment and growth. Only when such a major `U' turn in policy approach takes place will the RBI be able to guide the banking system as a whole along socially relevant and meaningful lines.

In the 1970s and 80s, with all their negatives, the banking sector in the country had a compulsion to orient the flow of credit to the directives of social policy. The new initiatives such as SEFCs and enhanced linking of self-help groups with the banking system will only help to take away what is left with the development banks in the area of "development.'' It gives the wrong signal: "You rather focus on clusters.'' But considering all objective constraints, this is likely to breed inertia rather than dynamism on the part of SIDBI.

(P. M. Mathew is Director, Institute of Small enterprises and Development, Kochi. He can be contacted at ised@md2.vsnl.net.in)

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