New Delhi: India may soon have a registry for movable assets, making it easier for micro, small and medium enterprises (MSMEs) to borrow from banks to meet funding requirements. A similar initiative had widespread impact in China, which has just overtaken Japan as the world’s second biggest economy.
International Finance Corp. (IFC), a member of the World Bank Group, is in talks with India’s finance ministry to set up a registry for such assets, which include raw materials and equipment. Banks in India only accept fixed assets as collateral while giving loans to such companies, which have most of their capital invested in moveable assets.
“Banks cannot accept inventory or rolling stock as collateral as the borrower can move it at a later date. A registry will solve this problem,” said Anil Sinha, general manager, advisory services, South Asia, IFC.
A World Bank unit that invests in companies in developing countries, IFC has been involved in setting up similar registries elsewhere, including China and Jordan, where it has promoted the use of movable assets such as inventory, livestock, accounts receivable, equipment and machinery as collateral.
Officials of the finance ministry could not be reached for comment as they are quarantined ahead of the budget, scheduled to be announced later this month.
“Currently, banks give loans to SMEs after taking a fixed asset such as property as collateral. They do not accept even fixed deposits as collateral,” said Chandrakant Salunkhe, president, SME (Small and Medium Enterprise) Chamber of India.
Most companies that are starting don’t spend their money on acquiring fixed assets but instead on meeting working capital requirements such as raw materials, equipment, technology and skilled labour.
“Only once the company crosses a turnover of Rs5 crore do they look to buy property,” he said.
The setting up of the registry will make it easier for larger units within the MSME segment to borrow from banks, he said.
The government has been trying to facilitate the flow of credit to such units given their labour-intensive nature. Towards this end, it set up the credit guarantee fund trust for micro and small enterprises (CGTMSE) in association with the Small Industries Development Bank of India with a corpus of Rs2,500 crore.
Banks can give loans up to Rs1 crore to such companies without collateral or third-party guarantees; CGTMSE will act as guarantor. The programme is only for manufacturing and select services companies.
Outstanding bank credit to micro and small enterprises stood at Rs2,96,461 crore, around 12% of the total adjusted net bank credit, as of March 2010, according to the Reserve Bank of India data.
Loans to companies in this segment have been accelerating and constitute almost 17% of advances by State Bank of India (SBI), the country’s largest, said Diwakar Gupta, deputy managing director.
SBI has more than 1.5 million SME accounts.
However, attrition levels are high for such accounts as companies are unable to sustain the business model.
“We added 2 lakh new SME accounts last year. However, the net addition was only 40,000 accounts. The remaining 1.6 lakh went out of business,” he said.