The Hindu : Business : SSIs deserve a better deal

Online edition of India's National Newspaper
Monday, Jun 20, 2005

Business

Business

SSIs deserve a better deal

The sector needs adequate political and appropriate bureaucratic support for competitive efficiency

The letter and spirit of RBI guidelines are often ignored by banks.

ENDEMIC SICKNESS: Inside a small scale diamond cutting unit in suburban Thrissur in Kerala. Sickness is widespread in the SSI sector for a variety of reasons.

THE SIGNIFICANT growth of small scale industries in India over the last five decades is on account of the high priority accorded to this sector by the Union Government and the Reserve Bank of India. The number of SSI units increased from 8.74 lakh in 1981 to 34.64 lakh in 2002.

These units have made significant contributions in terms of output, employment and export earnings. The sector is important because it promotes growth with equity. Its rate of employment creation across the country is among the fastest for any sector. However, its contribution to the country's economic development is not generally appreciated.

The post liberalisation scenario has witnessed a number of initiatives aimed at easing controls and regulations, supportive measures such as the Delayed Payment Act and schemes for ISO-9000 quality certification and the Prime Minister's Rozgar Yojana. Nevertheless the widespread sickness in small industries has not received focussed attention and is a matter of grave concern and debate.

While the liability of the corporate sector is limited by law, any loss in business can bring disaster to a small entrepreneur and ruin his business career. There is no proper exit route for him. An entrepreneur is a scarce resource for any country and his success confers manifold benefits on the society and the government. He should not be penalised and left alone in times of loss. Even developed countries like America accept the failure of enterprises and do not attach the dwelling house of a failed entrepreneur's family. In India, banks attach the living homes of such entrepreneurs given as collateral.

Combination of factors

The reasons for the failure of units are many. It is usual for banks to blame the entrepreneurs for the failure and the units to blame back the banks. What is lost sight of in the counter offensives is that the real cause of sickness is not identified in time and remedial measures are not initiated promptly. Sickness has become endemic in small industries owing to a combination of factors such as inadequate and delayed institutional finance, inefficient and non-professional management, shortage of inputs including power, labour unrest, technological obsolescence, market failure and competition.

Economic reforms and globalisation have postulated competitive efficiency as the critical determinant factor in business. In order to re-emerge as organic parts of a globally competitive industrial economy, Indian small industries need adequate political and appropriate beauracratic support. The letter and spirit of RBI guidelines on credit delivery mechanism, aspects of collateral and term lending advances are often violated by banks. There is no accountability and control mechanism from the RBI to enforce its guidelines on commercial banks. The SSI ministries at the Centre and in the States are mute observers of this anomaly.

NPA, an excuse

The issue of non-performing assets (NPAs) has engaged continual attention of banks, financial institutions and all others concerned. The NPA level in India, as shown by a study by Ernst and Young, is only 5 per cent of the GDP compared to 44 per cent in China, 41 per cent in Malaysia, 26 per cent in Japan and 25 per cent in South Korea. The governments in those countries still continue to support their banks. When there is growth, it is bound to face some failures also. The Indian banking sector should understand this basic factor and support the SSI units. Though the banks cite the high NPA as the reason for their stance, the fact is that they have become risk-averse because of the stringent accountability norms for bank officials.

It is a revelation that the amount locked up in sick small industries has gradually gone up from around Rs. 2,792 crore in 1991 to over Rs. 4,506 crore in 2001 out of the total outstanding amount of Rs. 23,556 crore as on March 31, 2001 for both SSI and large industries. An interesting feature of this aspect is that in terms of percentage the small industries account for 98.74 per cent out of a total of 2.53 lakh sick units in the country. On the other hand, in terms of outstanding amount, they represent just 19.12 per cent out of the total outstandings. The average amount blocked per SSI unit is only Rs. 1.8 lakh whereas it is Rs. 6 crore blocked per large unit.

The RBI has now directed stringent NPA norms for SSI units as part of the initiatives to achieve international banking norms. Earlier an account became NPA only when the interest repayment was due for three quarters (nine months). This period was reduced to two quarters (six months) and now it is one quarter (three months). Steps are under way for a further reduction to one month to classify an account as NPA. Many government undertakings like State electricity boards, PWD and other corporations make payments to SSI units after 120-180 days. Even the Delayed Payment Act has lost its validity to benefit the SSI units.

Instead of understanding the real problems of the SSI units, commercial banks aver that they are only regulated by the RBI guidelines for NPA norms. Once an account becomes NPA, the entrepreneur is deprived of credit facilities. This leads to a situation where the unit in distress cannot sustain for long and is forced to become sick. What is worrying more is that some banks are appointing private agencies to collect the dues from NPA account holders. The attitude of these agencies who work for a commission is well known through their behaviour at the entrepreneur's residence. Further, this will demoralise small entrepreneurs and their families and have a negative impact on the promotion of entrepreneurial activity. This move must be stopped immediately by the RBI as advertisements have already come in papers for appointing private collection agents. Small industry associations have already opposed this unhealthy move of banks.

Since small industries are distributed over different States a clear policy direction from the Centre on sickness is required. This will help accelerate employment generation. Major sickness is noticed in West Bengal (1.13 lakh units), Uttar Pradesh (23,117 units), Bihar (16,432 units), Andhra Pradesh (11,841 units), Kerala (11,144 units), Tamil Nadu (9,959 units) and Maharastra (8,056 units).

The RBI has formulated norms for identifying sickness and devised a rehabilitation package for nursing sick SSI units. These are periodically reviewed to improve the mechanism of implementation. State level inter - institutional committees are set up in all the States by the RBI. The State government, banks and SSI associations are members of the committee which review and recommend rehabilitation measures for sick SSI units. However, the effectiveness of the SLIIC has not percolated down the stream as the RBI often takes sides with bankers and disallows the Association representations made in the right spirit.

Suggested reliefs

A working group under the chairmanship of S. S. Kohli went into the entire spectrum of sickness in small industries in 2001 but its findings are yet to get reflected at the grassroots level. A successful remedy lies in detecting incipient sickness and applying a prompt rehabilitation package.

The broad parameters of relief to alleviate sick units may be envisaged as under.

For working capital loan/ term loan/ contingency loan; interest rate at 2 per cent below PLR; and interest-free funding of accumulated interest; interest at three per cent below PLR for tiny units.

At present the discretion of deciding the rehabilitation package is given only to the financial institutions. This is not equitable and may lead to rejection of the rehabilitation package. It is advisable to include officials of the SSI ministry and NGOs like the SSI associations in the committee to finalise the package for individual units. Further, the Securitisation Act should not be applied to SSI units with outstandings below Rs. 1 crore and also when delayed payment cases of SSI are pending in facilitation councils. An honourable exit policy should be formulated for SSI units in case of failure, with one residential house spared from attachment as is practised in the U.S.

Sickness in small industries needs immediate attention for fostering a steady growth of the sector and establishing an egalitarian society with the creation of new job opportunities. SSI entrepreneurs expect from this government a lot of policy matching and removal of anomalies in the process of credit delivery mechanism by commercial banks. Even after thorough diagnosis of the `sickness factor', if appropriate remedial measures are not forthcoming from the decision makers, it only reflects the attitude and commitment of the political leaders on the major agenda of employment creation for the masses.

A. Selvaraj

Past President, Tamilnadu Small & Tiny Industries Association (TANSTIA)

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