Even though they contribute significantly to India's GDP, most small enterprises find it very difficult to get credit
Small enterprises not only contribute a substantial portion to national income but also employ more people per unit of investment than big companies. Yet, banks and financial institutions provide step-motherly treatment to
small firms when it comes to disbursement of loans. Denied access to cheap and easy finance, such enterprises—sometimes derided as mom-and-pop businesses—are unable to expand operations and create job opportunities.
Whereas micro, small and medium enterprises (MSMEs) contribute around 8 percent to India’s gross domestic product and roughly 45 percent to the country’s total manufactured output and value of exports, such organizations are often starved of credit bearing low interest rates despite a host of official directives that have been put out from time to time. As the government’s latest Economic Survey for 2009-10 published in February pointed out about MSMEs: "… high labour to capital ratio, high growth and high (geographical) dispersion makes them crucial for achieving the objective of inclusive growth."
The quick results of the Fourth All-India Census of MSMEs indicate that there were roughly 26 million such enterprises in 2006-07 providing employment to around 60 million people. Another set of documents put out by the National Commission for Enterprises in the Unorganized Sector (Arjun Sengupta committee) in November 2007, however, claims that in 2007, there were an estimated 58 million small enterprises in the country, with a total workforce of 104 million—after excluding "medium" enterprises.
If the latter estimate is more accurate, it would imply that one out of ten Indians is employed by a small enterprise. Almost all these enterprises are in the non-farm sector and each has an investment of not more than Rs 5 lakh. The government has defined a "micro" and a "small" enterprise on the basis of original value of investment in plant and equipment—up to Rs 10 lakh and Rs 2 crore respectively. What the Sengupta committee claimed is that these 58 million enterprises received only 2 percent of the total quantum of credit disbursed by scheduled commercial banks. At the lowest segment of the unorganized sector, namely, cottage industries run by artisans, the proportion is even lower at 0.6 percent of gross bank credit. Data provided by the Reserve Bank of India (RBI) indicates that micro and small enterprises received a much higher 12 percent of the gross bank credit as on November 2009.
Without quibbling about the figures, what is significant is that the Sengupta Committee found that almost the entire credit that has gone to small and micro enterprises has been on account of government-promoted program. The panel urged the establishment of a separate fund for small enterprises because of the poor track record of the two existing development banks, namely, the National Bank for Agriculture and Rural Development (NABARD) under the RBI and the Small Industries’ Bank of India (SIDBI).
Disbursing credit to enterprises in the unorganized sector is accorded the lowest priority by most banks and regional rural banks, which flout RBI guidelines that specify that loans up to Rs 5 lakh can be sanctioned and disbursed without collateral. In actual practice, just over a quarter of the loans disbursed to such enterprises are advanced without collateral.
It is clearly in the interest of the country to ensure that small and micro enterprises not just survive but prosper as well, thereby creating more employment.
The writer is an independent educator and a journalist with over 33 years of experience in various media – print, radio, television, the internet and documentary cinema.
To write to the author, please send an email to dare@cybermedia.co.in with the subject line 'Paranjoy Guha Thakurta'.
Disclaimer: The views expressed here are that of the author and do not represent the magazine's.
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