An Empirical Analysis
6.2 Evolution of SSI Financing Policy in India
Availability of timely and adequate financial assistance is sine qua non for the growth of any sector including SSI. Like any other sector, SSI entrepreneur needs two types of funds:
1. Term Capital or Long-Term Funds 2. Working Capital or Short-Term Funds
Term capital or long-term funds are required for the creation of fixed assets like land, building, plant and machinery and other capital assets. Working capital is the fund that an entrepreneur needs to carry on the day-to-day business like purchase of raw materials, electricity, water and payment of wages and salaries, etc. (DCSSI, 1971; SIDBI, 1999).
To meet the diverse financial needs of SSI entrepreneurs, several institutional arrangements have been made by the Government of India, over a period of time. A very firm foundation in this regard was laid during the Second Five Year Plan Period (1956–61) with the establishment of the State Financial Corporations (SFCs) by various state governments for granting term loans to SSI for acquiring fixed assets.
6 Entrepreneurship and Innovative Policies 87 During the same period, State Bank of India (SBI) had also drawn up a comprehen- sive scheme for providing financial assistance on liberal terms to SSI. In course of time, other commercial banks in the private sector followed suit and started giving financial support to SSI (DCSSI, 1971). The setting up of National Small Industries Corporation (NSIC) in 1956 followed by State level Small Industries Development Corporations (SIDCs) set up by a few State Governments for supplying imported and indigenous machinery on hire purchase basis represents another dimension of financial assistance provided to SSI. Thus by the late 1950s, financial infrastructure for SSI had taken a definite shape where “term loan” needs of the sector were met by SFCs and the state governments under the State Aid to Industries Act, supplemented by the support of NSIC and SIDCs. Whereas “short-term credit” needs were met by SBI and commercial banks. To induce the commercial banks to expand their lend- ing to SSI entrepreneurs, Government of India started a Credit Guarantee Scheme in 1960, under which loans granted to the sector are insured against losses on account of bad debts (DCSSI, 1971).
The establishment of Industries Development Bank of India (IDBI) in 1964 rep- resents another milestone in the development of financial infrastructure for SSI entrepreneurs (SIDBI, 1999). A significant responsibility of IDBI was to cater to the long-term credit needs of SSI entrepreneurs, among others. Till April 1990, IDBI as the principal financial institution for coordinating the activities of insti- tutions engaged in financing, promoting and developing industry, was also assisting SSI. IDBI had taken a number of measures to promote the flow of term finance to SSI entrepreneurs. Its assistance was indirect, by way of refinance through SFCs and banks; it also provided assistance to SIDCs. IDBI also operated a scheme for redis- counting bills arising out of the sale of indigenous machinery on deferred payment basis (RBI, 1992).
After the nationalization of 14 commercial banks in 1969, Government of India defined what is known as “the priority sector” to comprise agriculture, SSI, small business, small road and water transport operators, among others and stipulated that 40% of the net bank credit should flow to this priority sector. However, among the constituents of priority sector, the emphasis was to be on agriculture, SSI and small business (Chandrasekhar, 2005).
In 1982, government of India took another major step towards providing greater financial support to SSI entrepreneurs, among others, in the rural sector by setting up the National Bank for Reconstruction & Development (NABARD). NABARD is established as a development bank “for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural devel- opment and securing prosperity of rural areas and for matters connected therewith or incidental thereto.” (NABARD website).
However, perhaps the most historic development with reference to the finan- cial infrastructure for SSI entrepreneurs was the setting up of Small Industries Development Bank of India (SIDBI) as a wholly owned subsidiary of IDBI, to cater to the needs of SSI as an apex financial institution, in 1990. SIDBI has to serve
88 M.H.B. Subrahmanya and R. Majumdar as the principal financial institution for the promotion, financing and development of Indian industry in the small-scale sector and to coordinate the functions of the institutions engaged in similar activities. Significant responsibility was entrusted to the bank to assist the entire spectrum of SSI sector including tiny village and cot- tage industries in the decentralized sector (SIDBI, 1999). SIDBI was de-linked from IDBI with effect from 27th March 2000. SIDBI today provides direct as well as indi- rect assistance for the overall development of SSI through a network of 5 regional offices and 33 branch offices spread across the country (DCSSI, 2002).
Thus by the 1990s, Government of India has developed an extensive finan- cial infrastructure to meet the diverse credit needs of SSI entrepreneurs across the country (Table 6.1).
The onset of economic liberalization in 1991 marks another step in the devel- opment of financial policy for SSI in India. The exclusive ‘policy measures for promoting and strengthening small, tiny and village enterprizes’ emphasized the need for shifting from subsidized/cheap credit to adequate flow of credit (Ministry of Industry, 1991). The policy proposed significant measures to overcome the financial weaknesses of SSI:
1. Equity participation by other industrial undertakings in SSI not exceeding 24%
of the total shareholding.
2. Limited Partnership Act to enhance the supply of risk capital to SSI. Such an Act would limit the financial liability of the new and non-active part- ners/entrepreneurs to the capital invested.
3. “Factoring services” introduced by SIDBI to spread throughout the country through commercial banks.
4. A suitable legislation to be introduced to ensure prompt payment of SSI bills by its customers.
Since then, four Expert Committees have been set up to look into the problems of SSI from time to time:
1. Nayak Committee (1991–92) 2. Abid Hussain Committee (1995–97)
Table 6.1 Financial infrastructure for SSI in India
Institutions Institutions
for term loans for working capital
1. Small Industries Development Bank of India 1. Commercial banks (SIDBI)- Apex Bank
2. National Bank for Reconstruction and Development 2. Co-operative banks (NABARD)
3. State Financial Corporations (SFCs) 3. Regional rural banks 4. National Small Industries Corporation (NSIC)
5. State Small Industries Development Corporations (SSIDCs)
Source: RBI (1992).
6 Entrepreneurship and Innovative Policies 89 3. Kapur Committee (1997–98)
4. S P Gupta Committee (2000–01)
Of these, Nayak Committee and Kapur Committee exclusively dealt with the credit problems of the sector. Some of the major initiatives that have been taken as a result of the recommendations of these Expert Committees, since the early 1990s, are:
1. Earmarking of credit for tiny sector within overall lending to SSI.
2. Enactment of Delayed Payments Act in 1993.
3. Opening of specialized SSI bank branches. As of March 2002, 391 specialized SSI branches are working in the country.
4. Introduction of “factoring services” by Public Sector Banks.
5. Establishment of National Equity Fund (NEF). NEF under SIDBI provides equity type assistance to SSI units and tiny units at 5% service charges. The scheme has provision for a loan up to Rs. 1 million and project cost limit from Rs. 2.5 million to Rs. 5 million.
6. Technology Development & Modernization Fund (TDMF) through SIDBI.
TDMF scheme provides for direct assistance to SSI to encourage existing industrial units in the sector to modernize their production facilities and adopt improved and updated technology so as to strengthen their export capabilities.
Assistance under the scheme is available for meeting the expenditure on pur- chase of capital equipment acquisition of technical know-how, up-gradation of process technology and products with thrust on quality improvement, improve- ment in packaging and cost of TQM and acquisition of ISO-9000 series certification. Non-exporting units and units that are graduating out of SSI sector, are also eligible to avail assistance under this scheme.
7. Enhancement of composite loan limit to Rs. 5 million from Rs. 2.5 million.
Composite loan scheme is meant for equipment and/or working capital and also for work-sheds to artisans, village and cottage industries in tiny sector.
8. No collateral security for loans up to Rs. 2.5 million.
9. Launch of Credit Guarantee Scheme to cover loans up to Rs. 2.5 million.
10. Launch of Credit Linked Capital Subsidy Scheme (CLCSS) to provide for sub- sidy against loans taken for technology up-gradation. Under this scheme, ceiling on loans was raised from Rs. 4 million to Rs. 10 million with effect from 29th September 2005, and the rate of subsidy from 12 to 15%.
11. Enhancement of project cost limit under National Equity Fund to Rs. 5 million.
12. Introduction of Laghu Udyami Credit Card (LUCC) by Public Sector Banks for providing simplified and borrower friendly credit facilities to SSI, tiny enterprizes and artisans.
13. Interest rate band of 2% above and below Prime Lending Rate (PLR)
14. Reserve Bank of India (RBI) formulated the scheme of “Small Enterprizes Financial Centres” (SEFC) to encourage banks to establish mechanisms for bet- ter coordination between their branches and branches of SIDBI in the identified clusters for more efficient credit delivery
15. Working group to be set up on flow of credit to SSI
90 M.H.B. Subrahmanya and R. Majumdar Overall, the emphasis of these policy measures has been, among others, to facil- itate SSI entrepreneurs to overcome technological obsolescence and shortage of working capital in the era of economic liberalization.