The Hindu : Business : Policy package for SMEs announced

Online edition of India's National Newspaper
Thursday, Aug 11, 2005

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Business

Policy package for SMEs announced

Special Correspondent

Rs. 10-crore investment limit for MEs

NEW DELHI: The Government on Wednesday unveiled a major package for the small and medium enterprise (SME) sector aimed at doubling the flow of bank credit to such companies in five years, reducing their debt burden.

The policy package, tabled in Parliament by Finance Minister P. Chidambaram, envisages an annual growth of at least 20 per cent in the flow of credit to SMEs so as to double the quantum of bank loans extended to the sector to Rs. 135,000 crore by 2009-10 from Rs. 67,600 crore in 2004-05.

Alongside, the Reserve Bank of India (RBI) will issue guidelines for revamping the debts of viable SMEs on the lines of the corporate debt restructuring (CDR) mechanism, which is applicable for big companies.

The package provides for a one-time settlement scheme during the current fiscal for defaulting small-scale industry (SSI) units which have become NPA (non-performing assets) accounts in banks. The scheme is to be in force till March 31, 2006.

Transparent rating system

While directing the public sector banks (PSBs) to step up loans to SMEs, the Finance Ministry has proposed a "transparent rating system'' to enable banks to charge interest at rates in accordance with the credit rating of the borrowing companies. For this purpose, the Small Industries Development Bank of India (SIDBI) and the Credit Information Bureau India Ltd. (CIBIL) are expediting the setting up of a credit rating agency to rate the SME borrowers. In all likelihood, the agency may start operations next month.

SIDBI, along with the Indian Banks' Association (IBA) will also collect and pool common data on risks associated with each SME cluster and develop an IT-enabled application, appraisal and monitoring system which will help in reducing transaction costs as well as improve the credit flow to the enterprises.

The policy paper notes that having decided to accept the recommendations of an RBI internal group on treating companies having investment in plant and machinery in excess of SSI limit and up to Rs 10 crores as "Medium Enterprises" (ME), the Finance Ministry will accordingly request the Central bank to advise banks to frame a policy for enhancing credit flow to the SMEs.

The RBI panel had favoured continuation of the current definition of SSI but wanted it to be reviewed after enactment of the SME Development Bill. However, it made it clear that only SSI financing will be included in the priority sector for lend by banks.

In effect, the medium enterprises will not come under priority sector lending.

Although the Government's policies and the RBI's credit policy have thus far concentrated on SSI manufacturing units, the Ministry now wants to review the small sector definition so as to include services and trade within its ambit.

Explaining the rationale of the package, the SME policy statement said: "The size of the unit and technology employed for firms to be globally competitive is now of a higher order...In keeping with the global practice, there is also a need to broaden the current concept of the sector and include the medium enterprises in a composite sector called SME."

Primacy of manufacturing

The Chief Economic Advisor, Ashok Lahiri, who briefed newspersons later, said: "It [the package] underscores the importance that the Government lays on the resurgence of industry and the manufacturing sector... The stress on medium enterprises is because these units will graduate as large blue-chip companies in future,"

The policy package is also in line with the Common Minimum Programme's promise of providing the household and artisan manufacturing sectors with greater technological, investment and marketing support, freeing the small sector from `Inspector Raj' and upgrading infrastructure in major industrial clusters.

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