PHD Chamber of Commerce and Industry

The high cost at which credit is available to SMEs is proving to be a big impediment for the sector to grow. Industry contends that despite the monetary measures taken by the RBI over the last few months to help commercial banks to reduce the interest rates charged from exporters, SMEs and the corporate sector, the lending rates have not come down after the last budget. These are the findings of a recent survey undertaken by the PHD Chamber. The survey had 200 respondents.

An interesting finding, according to the survey, is that credit availability from banks, though important, has not been cited as a major problem by around 78 per cent of our respondents. Yet, around 22 per cent find it difficult to secure credit from banks. However, while availability of credit may not be a major problem, the high cost of credit definitely is. This is brought out in a further analysis which indicates that 78 per cent of units find that the cost of funds (ie the rate at which banks lend to companies remain high) has not come down during the last four months. Even among the remaining 22 per cent, who have reported a reduction in cost of credit, the extent of fall is marginal. In fact, the non-availability of funds at reasonable rates is increasing the cost of working capital and lowering the competitiveness of firms in the international marketplace.

“What is also worrisome is the likelihood of an increase in interest rates on account of the RBI’s gradual policy shift towards monetary tightening to curb inflationary pressures building up in the economy”, said Mr. Satish Bagrodia, President, PHD Chamber. Respondents feel that expansionary monetary policy should continue to boost demand in the economy. Some specific policy suggestions for improving the cost and availability of credit to SMEs, as given by respondents, are as under:

Provide credit to the MSME sector at least at PLR
Devise a strategy for cost effective finance to the micro sector.
Provision of automatic enhancement of Working Capital Limits by 25% after every 2 years to prevent
sickness among MSMEs. In fact, one of the reasons for sickness in MSMEs- that has increased from 13.98% in 2001-02 to 14.47% in 2006-07 as per the Fourth census of MSMEs- is shortage of working capital.
Streamline the lending mechanism of banks. Delay in sanction, renewal, disbursement of loans and documentation procedures should be avoided.
Ensure financial inclusion of MSMEs by improving the delivery points for credit to MSMEs in terms of quantity and quality. Commercial banks may set higher targets for their semi-urban/ urban branches, to finance an average of at least 10 new accounts per branch per year compared to the existing target of 5 accounts.
Modify the guidelines of Credit Guarantee Fund Trust Scheme for Micro and Small Enterprises to increase coverage of all micro enterprises to 80%. The government may explore the possibility of bearing the entire premium. Women entrepreneurs may be provided credit at lower rates of interest up to a limit of rupees 50 lakhs as compared to the existing 10 lakhs.
Launch a separate stock exchange for SMEs to provide an avenue for timely availability of equity or risk capital, which complements bank credit as an important component of finance.(SEBI also appears to be in favour of the same)
Develop a long term corporate bond market.

“It is also hoped that the recent support from International Financial Institutions like the World Bank, to the extent of $ 4.3 billion to support India’s economic recovery by enabling enterprises to get access to credit and enabling investment in infrastructure sector, translates into higher credit to the sector at competitive rates”, added Mr. Bagrodia.