But benefits of RBI’s policy actions haven’t yet started trickling down to SMEs, small business owners say. Several firms are turning to chit funds, some of them unauthorized, to raise finance, according to at least two entrepreneurs, who didn’t want to be named. Others, such as Singh, are turning to friends and relatives.
Two recent surveys on small companies highlight their difficulties. A report released by Kadence Research India says a survey of SMEs showed that only 40% of 300 respondents could secure funds when needed. A snap poll conducted by CII showed 66% of 150 respondents citing high interest rates and banks’ reluctance to lend among the impediments to their growth.
“There is an undeclared credit freeze. Everything is on hold,” says Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small and Medium Enterprises (Fisme).
Banks insist they aren’t slowing lending to SMEs. “There is no such problem. We have not received any complaints,” says R.V. Singh, a credit manager at Punjab National Bank (PNB).
Lending to small-scale industry falls under the so-called priority sector and entrepreneurs are allowed to borrow up to Rs50 lakh without collateral under current government guidelines. But Fisme’s Bhardwaj says banks rarely fulfil this commitment. “A small guy will be lucky to get more than Rs3 lakh against collateral,” he adds.
Growth in gross bank credit to the small-scale sector has halved between 1996 and 2007 to 6.34% from 12.66%, according to RBI data.
“Banks are taking steps; they have promised to abide by the guidelines under priority sector lending,” says Dinesh Rai, secretary of the ministry of micro, small and medium enterprises.
The CII survey showed that 78% of the respondents used private equity as the major source of funding, while 21% say they depended on venture capital financing. Only 13% say they sought loans under the government’s credit guarantee scheme, aimed at helping small companies get bank credit without collateral or third-party guarantees.
“But a majority of small industries do not have access to venture capital or private equity funding,” says Ramesh Datla, chief executive officer of Hyderabad-based laboratory instrument making company Elico Ltd.
“Our view is that if the current situation persists, employment will go down,” says Datla, who also heads CII’s National SME Forum.
CII has suggested easing rules relating to foreign direct investment (FDI) in SMEs, which is effectively capped at 24%. An SME would lose its status as a small or medium enterprise if FDI exceeds 24%. CII has also suggested setting up a special stock exchange for the sector to raise between $1 million (Rs4.77 crore) and $10 million by selling shares to the public.
Banks, CII claims, have been reluctant to lend to small-scale units partly because the government currently provides insurance for only 80% of the loan amount.
Entrepreneurs say the lack of capital has put their expansion plans at risk. Naveen Jain’s company, Dayachand Engineering Industries Pvt. Ltd, welds electrodes and wires for the steel fabrication industry. It employs 25 people at his factory in Muzaffarnagar in Uttar Pradesh and posted a turnover of Rs3.5 crore last year.