Everyone is aware of the contributions of the micro, small and medium enterprises (MSMEs) to the society. With the MSMEs, a country’s growth becomes more inclusive, employment-friendly, and there is greater regional balance in the levels of development. The very positive contribution that this sector makes to employment and exports is of utmost importance to our vision of shared and equitable growth. This sector provides employment to over 42 million people. It contributes about 45 per cent of the total manufacturing output and nearly 40 per cent of India's exports. Besides its obvious role in employment generation, the MSME sector also provides essential components and accessories to the large manufacturing sector and value addition to the agricultural products. This triggers rapid industrialisation and ,to a great extent, alleviates poverty.
The MSMEs have shown consistent dynamism in respect of growth in the number of enterprises, production process and the capacity to contribute to manufacturing output and exports. The MSME sector showed strength and resilience in the face of competition during the liberalisation era. This shows that the MSME sector in India is a capable and strong one. Why then do MSME units fail to show this strengthIJ Why has their growth been slow and performance mediocre or even poor in the past few yearsIJ There are about 50 per cent of the MSMEs across the country which are either closed, sick or suffering from incipient sickness with stressed accounts.
MSMEs seldom become sick because of term loans. Had the availability of term loan been an issue, the very establishment of MSMEs would not have been possible. This sector is also not sick because of Government policies, stringent regulating authorities or restrictive law practices. On the contrary, such restrictions have been waived by the Government in an attempt to bolster industrial growth. What then could be the real cause for the ongoing struggle that MSMEs have been dealing with for so longIJ
The basic functioning of an MSME depends on the availability of need-based working capital, which forms the heart and soul of the unit. Without adequate working capital, the capacity utilisation of the unit gradually diminishes until it reaches the breakeven point and then the unit incurs loss and eventually the account becomes NPA (non-performing asset). It is the timely and need-based availability of working capital that determines a unit’s odds of prosperity.
As per the present banking norms, the working capital limit is renewed every year. With a constant rise in the input cost, enhancement of the limit is a must. This is of utmost importance as only when enhancement of working capital is done, a unit is given the needed impetus to cope with the vagaries of the changing prices and fluctuating market scenarios. When such dynamic forces are in operation, access to limited means of working capital will only serve to worsen the condition of a struggling MSME and affect all areas of its operations, be it marketing, personnel, maintenance or production.
Input costs, mostly raw materials, electricity and labour, are ever rising. Therefore, an MSME needs to have the matching working capital to adapt flexibly to the changing scenario. It is, therefore, the responsibility of banks to look into such requirements and provide enhanced finance to MSMEs to help them deal with such predicaments. Not only should adequate working capital be sanctioned, but it should also be sanctioned in time.
The present-day computation of working capital (WC) carried out on the basis of the Naik Committee recommendations up to a working capital limit of Rs 5 crore from the banking system, on the basis of minimum of 20 per cent of the projected annual turnover for new as well as existing units, beyond which working capital be computed on the basis of WC cycle does not specify the quarterly enhancement of need-based WC. In case of a borrower desiring facilities under these recommendations and having a WC cycle of more than three months in a year, the WC requirements would be funded after assessing his requirements on the basis of his WC cycle, after fixing proper margins is also ambiguous.
Generally, the banks implement the 20-per cent enhancement on the previous year’s turnover against the projected turnover as envisaged causing inadequacy of WC. For units exceeding three months WC cycle, there is no fixed norm either. The Naik Committee recommendations, not being mandatory and binding on the banks, such recommendations have not produced the desired results.
In the present scenario, since the repayment cycle has been brought down to a monthly basis and the NPA norms have been revised from a period of one year to six months and three months of default, the WC enhancement must also be made on a quarterly basis to ensure timely availability of funds to the unit. Whereas, it has been observed that there are many units, despite their meeting the projected turnover and registering profits, the WC enhancement has not been provided to them for several years, resulting in the account becoming NPA and eventually closure of the unit.
Many such incidents lead to economic downturn and deterioration of assets in the national scenario. Hence, it is the role of the RBI that needs to be emphasised here as this apex bank holds the authority as the supreme decision-making body with regards to banking regulations. Thus, it should devise a system to formulate a policy of WC enhancement on a quarterly basis, which must be automatic and binding on all banks.
A formula of enhancement of WC to be released every quarter by the Nodal Agency, herein the RBI or any other designated body, based on which the enhancement must be carried out by the commercial banks.
Under this system, the Nodal Agency should take up the task of asserting a category-based price index fixation policy. In this system, categories of all industries like chemicals, plastics, textiles, rubber, tea, seafood processing are to be studied in the context of their input price fluctuations in the last quarter. Accordingly, the Nodal Agency to declare the percentage of the fluctuations in the input costs of various industries and that of the WC limit that should be provided to the MSMEs in that particular segment. Since the input costs are constantly rising in almost all industrial segments, in almost all cases it has to be the enhancement of limit and under the present scenario, reduction of the WC limit does not appear to be applicable.
Viewpoints to formulate a WC enhancement formula by the Nodal Agency:
(1) The RBI to designate a Nodal Agency or devise a cell within its system to study the price fluctuation s in industries every quarter.
(2) The study should be published in a quarterly bulletin with the Price Index which should be available to the public to add authenticity to the system. (3) The actual fluctuation of prices in the preceding quarter should be considered to make the system full proof. (4) All input costs must be considered and the price index formulated. (5) Based on the above data, the Nodal Agency must release the percentage of enhancement or reduction in the WC for every segment of industry on a quarterly basis. (6) This percentage of enhancement or reduction of WC based on the above data must be automatically implemented in all MSMEs of their respective industrial segments on their existing limits. (7) The Nodal Agency must have the authority and the designated powers to ensure that its decision is binding on the banks.
Presently, there is no fixed norm as to how the banks are to calculate the enhancement of WC required for a particular unit which leads to ambiguity and delay. In many cases, the enhancement is deferred causing serious harm to a deserving unit. Vide suggestions made above, though seems complicated in the first instance, on a regular basis the benefits can be enormous and definitely worth implementing. Vide this formula, besides the industries, even bank officials will be at ease to implement the decision as stipulated in the bulletin.
(The writer, the Working Chairperson of the Entrepreneurs & Finance Customers Association of India- EFCAI, can be contacted at efcai12@gmail.com )