Will SSI financing be left to the whims of banks?
R. Gopalakrishnan
The draft report of an internal group of the Reserve Bank of India (RBI) to review guidelines on credit flow to the small and medium enterprises (SMEs) has lived up to the change in policy direction indicated by the annual credit policy statement of the apex bank issued in April.
The report of the group, headed by C.S.Murthy, masks, in the midst of several inane and materially insignificant "recommendations", a crucial suggestion that the RBI withdraw instructions contained in some important circulars of the bank regarding financing and rehabilitation of small scale industries (SSIs) and leave it to banks to decide the matters concerned. And the report says, "It is expected that the policies formulated by the banks will be more liberal than the existing policies".
The only hold that the RBI will have over bank financing of SSIs (if the report is implemented) is that the definition of sickness in small units will continue to be governed by the criterion fixed by the RBI, viz. "When any of the borrowal accounts of the unit remains subs-standard for more than six months".
Subject to this, "all the instructions relating to viability and parameters for relief and concessions to be provided to such SSIs as prescribed by the RBI may be withdrawn and banks may be given freedom to lay down their own guidelines with the approval of their boards".
The report suggests to bank boards that in fixing their own guidelines, they may treat as indicative the guidelines recommended by the S.S.Kohli Committee.
Thus, after years of trying to coax or appearing to coax banks into meeting the credit needs, especially for rehabilitation or one-time settlement, of SSIs, the RBI has left the major agenda of "restructuring" of SSI accounts to the banks' boards.
Such a decision might have arisen more from the broad policy framework and stance of the Union government than from any attitude of the RBI itself towards the small industry sector.
However, the structure of the SSI and tiny sectors in India, cited by the report on the basis of the Third Census of SSIs, itself shows that small and tiny units cannot be treated on a par with units which could be considered as medium in the Indian context (just as the SMEs in India can in no way be compared in size and market clout with SMEs in Europe and other developed countries).
Also, as indicated by the annual credit policy statement, the draft report shows an understandable and valid eagerness to recognise the needs of the larger among small industries and medium industries.
It lays down parameters for financing and "restructuring of accounts" of units with credit limits up to Rs 10 crores, including in the case of consortium lending. But what is objectionable is that by resort to the concept of supporting SMEs, problems and needs of a vast majority of SSIs and tiny units, whose position is far, far lower than that of "medium" sector units, are swept under the carpet.
The rest of the recommendations of the report make little sense or significance. What big difference would it make whether banks designate "specialised branches" one way or another or allocate loan sanctioning powers to officials at different levels one way or another?
Of similar insignificance are recommendations relating to State-level coordination with State government organisations and SIDBI, since mechanisms for such cooperation already exist, though without much to show by way of results. It says bank branches should display the name of the nodal officer for financing SMEs.
One wonders whether any lesson has at all been learnt from the fact that banks have not implemented Banking Ombudsmen's suggestion that branches display prominently the option available to customers to resort to the Ombudsmen in case of deficiency of service.
The lesson from the draft report of the RBI's internal group is that the banking mechanism could not by itself be expected to understand or do justice to the needs of a vast section of the productive (manufacturing and service) sectors, if the policy-makers at the Central and State governments do not adopt a transparent, clear and realistic approach to these sectors.
(Published on May.08, 2005)
SSIs : A review
