SPECIAL ARTICLE

Credit Retrogression in the Micro and Small Enterprise Sector

Achintan Bhattacharya

This paper attempts to understand the nature, dimensions and direction of flow of bank credit to micro and small enterprises with special reference to the manufacturing sector in the wake of post-1991 reforms that promised a better play of market forces. It finds that despite substantial increase in absolute credit deployed through the banks, the share of credit to MSES in general, and manufacturing MSES in particular declined, picking up only over the past few years. Within the manufacturing sector, bank credit went mainly to large and medium sized manufacturing units. The evidence is indicative of structural retrogression of credit to MSES and contradicts the notion of price signals in the credit market allocating credit to sectors like MSE at higher interest rates, thereby generating additional income, employment and demand for goods and services, and in turn, supplementing the National Manufacturing Policys objective of high growth in the manufacturing sector to generate 100 million jobs in the next five years.

1 Introduction

The views expressed in this article are personal and not those of the institutions the author represents. The author is grateful to Sudip Choudhury, Ravindra Dholakia, R K Das, and an unknown referee for their comments on an earlier draft. The usual disclaimers apply. Achintan Bhattacharya (achintan.b@nic.in) is with the Department of Financial Services, Government of India, New Delhi and the National Insurance Academy, Pune.
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ver the past two decades after the economic reforms began in 1991,1 growth of micro and small enterprises (MSEs)2 in general and manufacturing industries in particular has been far less than satisfactory. The Twelfth Five-Year Plan envisages massive employment generation and other concomitant macroeconomic benets. The National Manufacturing Policy (NMP 2011) also promises to promote 12% growth in manufacturing and generate 100 million jobs in the next ve years. These aims could be realised if there is growth of the industrial sector and, more particularly, if such a growth is spearheaded by the manufacturing sector and led predominantly by the small and unorganised sectors. This is because it is in this MSE sector that 90% of employment generation takes place (Trivedi et al 2010). Post-liberalisation, the banking sector reforms in India endeavoured to promote a diversied, efcient and competitive nancial system in India for improving the allocative efciency of resources through operational exibility, improved nancial viability and strengthening of institutions (Mohan 2005). But despite improved nancial intermediation and near double-digit growth over the past decade, manufacturing industries within the industrial sector have not led the growth story in India as in China or other countries.3 Available studies on post-reform industrial growth in the manufacturing sector in India substantiate this notion. These studies show that (1) The organised manufacturing sector grew at a higher rate than its unregistered counterpart where durable goods, capital goods and intermediate sectors experienced growth (Trivedi et al 2010). Output in the organised manufacturing sector increased three times during 1994-2008 but the number of factories and employment remained at about the same level (Gokarn 2010). (2) Growth of industries having high and medium technology content decelerated, threatening industrial sustainability (Mehta 2011). (3) In the case of employment, as against 60 million jobs created in the period 1999-2000 to 2004-05 just about a million jobs were created in the period between 2004-05 and 2009-10 and there was increasing casualisation of labour ( Rangarajan et al 2011). (4) There was a relative decline in credit ow to the small and medium enterprises (SMEs) with a contraction of the proportion of priority credit despite a spurt in credit in 2004 and
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underpricing of loans under lower risk perception in favour of large borrowers (Sen and Ghosh 2005). (5) The Indian manufacturing sector, credit-centric in pre-liberalisation period, experienced a signicant decline in the availability of loanable funds in the post-liberalisation period due to risk aversion of banks and the gradual decline of developmental nancial institutions (Bhattacharjee and Chakrabarti 2013) In the commercial banking sector, economic reforms promised to promote a broad market-driven agenda. In postNarasimham Committee-led Banking Reforms in India, and later after the deregulation of interest rates, it was expected, at least theoretically, that credit would become cheaper and that it would ow to sectors that are more protable for the banks, and naturally, in favour of those sectors that pay higher rates of interest as determined by credit-market forces. In that event, the MSE sector, which faced the highest interest rates from banks, should have been the largest beneciary of bank credit. In principle, therefore, banking reforms were expected to address a much broader concern of credit constraints as well as issues related to the lopsided pattern of credit deployment. But contrary to expectations, credit ow to the MSE sector continued to decelerate throughout the 1990s and in the rst half of the rst decade of the 21st century and revived only over the past three years. There are ofcial reviews on the deployment of credit across sectors undertaken by the RBI, the Planning Commission and the Ministry of Finance, etc. In addition, there are a large number of studies on various aspects of industrial production in respect of both the organised and unorganised sectors, including the manufacturing sector. But there are few studies on the nature and composition of nancial intermediation in the MSE (earlier small-scale industry) sector in particular.4 The present study, therefore, examines the nature and direction of changes in nancial intermediation in terms of credit ow for a crucial sector like MSE and, more particularly, manufacturing MSEs that have the potential to absorb labour, all this, in the wake of reforms after 1991, across the organised and unorganised sectors, size groups and categories. The choice of the MSE sector was due to its great potential for banks. In the coming decade, according to a recent market survey report, across the globe, including India, banks can share a potential $350 billion micro, small and medium enterprise (MSME) market (Mufsa et al 2012). In the Indian context, it has alternatively been argued that the MSME sector holds an important key to the future of the Indian economy as it offers a huge scope for banks to push credit. The country is likely to experience a very rapid rate of product obsolescence, innovation for exclusive consumption and higher service orientation in its private consumption pattern. This would call for a decentralised, smaller-scale, service-oriented production structure. Nonconventional products and services will need credit where the interest rate may not matter. This need is not being addressed effectively by the private sector banks and leaves a large gap in service and access an opportunity to be grabbed by the public sector banks in particular, as already
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demonstrated by some successful micronance interventions (Dholakia 2012).

2 MSE Sector and Overall Credit Flow

According to the Fourth All-India Census of Micro, Small and Medium Enterprises (MSME, reference period 2006-07), within the MSME sector, 67% are manufacturing enterprises and 33% services enterprises with more than 6,000 products. About 45% of the units were located in rural areas. Of the total working enterprises, the proportion of MSMEs were 94.94%, 4.89% and 0.17%, respectively (CSO 2009). This sector is highly heterogeneous in terms of size, product variety, services and levels of technology. The MSE contribution to gross domestic product (GDP) has been increasing and was about 8.7% in 2008-09. The MSME sector employs an estimated 59.7 million persons spread over 26.1 million enterprises. In terms of value, it accounts for about 45% of manufacturing output and around 40% of total exports of the country (CSO: 2009).5 The division of MSE sector into manufacturing and service enterprises ows from the MSME Development (MSMED) Act, 2006 which denes enterprises based on their investment in plant and machinery for manufacturing enterprises or on equipment in respect of service enterprises. However, for the purpose of credit dispensation, only MSEs are covered under the priority sec- Table 1: Micro and Small Enterprises (in Rs) Manufacturing Enterprises Service Enterprises tor by RBI while me(Ceiling on investment in (Ceiling on Investment dium enterprises do Plant and Machinery) in Equipment) not enjoy such regula- Micro 25 lakh 10 lakh tory patronage. The Small 5 crore 2 crore classication is given Medium 10 crore 5 crore in Table 1. According to the data compiled by the Ministry of MSME, the MSME sector as a whole has been growing faster in terms of production (11.4%) compared to its employment growth (5.4%) during the three years from 2007-08 to 2009-10 (Table 2, p 107). Viewed from the context of the overall perspective of the structural changes that took place in the Indian economy and in the banking sector, it is found that the average share of the manufacturing sector in real GDP has marginally increased from about 13% during 1970-75 to about 15.6% in 2007-08. Besides, from a situation of more or less equal distribution between registered and unregistered segments in 1970-75, the contribution of unregistered manufacturing industries declined over time and now accounts for about 80% of employment and 33% of the total income of the manufacturing sector. As a result, over the years, employment in the manufacturing sector, so crucial for inclusive growth and the main absorber of mass unskilled labour, has not increased (Trivedi et al 2010). Evidence also suggests that a major share of bank credit went to the corporate sector (RBI 2010; 2011a); not only that, this sector got credit at a cheaper rate than its poorer counterparts due to its superior bargaining power. As revealed in the report of the Khan Committee on working of the benchmark prime lending rate (BPLR), sub-PLR lending of public sector
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Table 2: Basic Characteristics of Growth of the MSME Sector
S No Year Total MSMEs (Lakh Numbers) Fixed Investment (Rs Crore) Production (Rs Crore @ Current Price) Employment (Lakh Persons)

1 2 3 4 5 6 7 8 9 10 11 12 13

1992-93 1993-94 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10# 2010-11*

73.51 (4.07) 76.49 (4.07) 101.10 (4.07) 105.21 (4.07) 109.49 (4.07) 113.95 (4.07) 118.59 (4.07) 123.42 (20.76) 261.01 (21.50) 272.79 (4.51) 285.16 (4.53) 298.08 (4.53) 311.52 (4.51)

1,09,623 (9.24) 1,15,795 (5.63) 1,46,845 (4.90) 1,54,349 (5.11) 1,62,317 (5.16) 1,70,219 (4.87) 1,78,699 (4.98) 1,88,113 (4.07) 5,00,738 (111.48) 5,58,190 (11.47) 6,21,753 (11.39) 6,93,835 (11.59) 732.17 (5.29)

84,413 (4.71) 98,796 (17.04) 2,61,297 (11.78) 2,82,270 (8.03) 3,14,850 (11.54) 3,64,547 (15.78) 4,29,796 (17.90) 4,97,842 (5.27) 7,09,398 (166.20) 7,90,759 (11.47) 8,80,805 (11.39) 9,82,919 (11.59) 7,73,487 (11.48)

174.84 (28.10) 182.64 (4.46) 238.73 (4.21) 249.33 (4.44) 260.21 (4.36) 271.42 (4.31) 1,24,417 (27.42) 1,50,242 (4.37) 1,82,538 (101.62) 2,02,017 (10.67) NA NA NA

while the share of short-term credit to industry declined from 82.5% in 1995 to 44.8% in 2009-10.9 However, the bulk of longterm credit was accounted for by large borrowers in infrastructure (RBI 2010). In terms of sector-wise composition of credit deployment, there was a substantial increase in credit deployed in the industrial sector, particularly in the last decade (2001-10) from about 17% in the 1980s, credit growth declined to 15.4% in the 1990s to revive at 20.6% in the rst decade of the new century. The rate of growth of credit to medium and large industries was higher, remaining around 35%, but the share of MSE (the erstwhile SSI sector) declined drastically by 60% over the past three decades (RBI 2010; 2011a).
3 Credit Flow to the MSE Sector

(1) Data with respect to MSME have been collected/compiled in 2006-07 and hence include both the industry and services sectors. The figures in brackets show the % growth over the previous year. The data for the period up to 2006-07 is only for small-scale industries (SSI). Subsequent to 2006-07, data with reference to micro, small and medium enterprises have been compiled from the Annual Report of the Ministry of MSME. (2) The paucity of data and understatement of the reality in the SSI (now MSME) sector from the representative sample of data collected by the Ministry of Commerce and Industry (earlier) and now by the Ministry of MSME comes to light when contrasted with census figures of 2006 -07, read with the Report of the NSEUS under the chairmanship of Arjun Sengupta, it appears that the plight and struggles of lakhs of tiny enterprises, mostly tiny family firms in the unorganised sector go unrepresented and under-reported. That is the reason why there is an upward jump in every indicator in 2006-07, the census year. # Provisional; * Projected Source: Annual Report 2011-12, Ministry of MSME, Government of India.

banks (PSBs) increased from 28.4% in March 2001 to 77% in March 2007 mainly to the corporate and big-ticket borrowers (Chandhok 2010).6 This apart, banks also seems to have played safe as they became more risk averse (RBI 2010).7 There was a relative decline in credit ow to the SMEs with a contraction of the proportion of priority credit despite a spurt in credit in 2004 and under-pricing of loans under lower risk perception in favour of large borrowers (Sen and Ghosh 2005). What is more conspicuous is that while banks faced genuine shortages of worthwhile projects to nance, they were ush with surplus liquidity and parked them in government securities in excess of regulatory requirements. Thus, in a situation of robust credit growth, stagnation and decline in credit growth in desirable sectors paying a higher rate of interest like MSEs resulted in what could perhaps be called credit narrowing8 if not credit retrogression. There was also a change in the overall composition of credit from banks; ow of bank credit to industry changed in its character it became predominantly long term. The share of long-term credit to industry increased more than three times, from 11.6% of total industrial credit in 1995 to 39.8% in 2009-10
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Table 3 (p 108) shows that the share of MSE/SSI in the industrial credit has declined drastically from 14.6% in 1990-91 (13.3% in 1981-86) to 5.81% in 2010-11. Credit to manufacturing MSEs steeply declined and became almost a third of what it was in the pre-reform period. For MSE, however, the growth rate of credit varied it declined between 1999-2000 and 2003-04 and improved, thereafter, quite substantially to 22.13% in 2009-10 but again declined to 11% in 2010-11. During the 1980s and 90s, the share of MSEs in bank credit remained stable at around 14%; but in the last decade (2001-10), the MSE share almost halved, remaining on an average around a little over 7%. Compared to 15.7% in March 1990, the absolute share of credit to the MSE sector became 5.6% at the end of March 2011. The MSE sectors share in credit to industry and in total priority sector advances also declined signicantly (Table 4, p 108). The number of loan accounts of the MSE sector with scheduled commercial banks declined too. The average annual growth of MSE advances decelerated to 13.12% in the 1990s from a level of 18.88% in the 1980s and improved slightly to 14.97% in the rst decade of the 21st century, still lower than the level achieved during the 1980s (Table 4). This deceleration of credit in MSEs and its declining share in bank credit over the last decade, however, needs to be viewed against the backdrop of a robust growth of overall bank credit averaging a little over 22% and a substantive credit growth to industry as a whole, averaging more than 21%. Growth in credit to medium and large industrial units remained a notch higher at 23%. The share of MSEs in total industrial credit, which had declined from 27.85% in 1991 to 16.57% in FY 2006, had started increasing since FY 2007 to improve to 30% in FY 2011. Still, at present, the share of micro enterprises in bank credit to MSEs hovers around 40% as against the regulatory guideline of 60% under priority sector lending. As regards level of long-term investment, the share of termloans in total SSI credit was 23.6% in 2000 and hovered between 19.3% and 22.7% in subsequent years till 2008. However, in 2008-09 and 2009-10, the share suddenly jumped to 28.3% and 34.4% respectively (Table 5, p 109). This long termisation of credit, theoretically, is a positive indication in the sense that if this trend continues for some more time, it would reect that the MSE sector is investing in medium-to-long-term
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Table 3: Bank Credit Flow to Industry by Size-Groups
Year Bank Credit Bank Credit Outstanding (Rs Crore) Ind MSE/SSI Industry (Medium (Small, Medium and Large) and Large) 3 4 5 Bank Credit Growth Rate (%) Industry Ind (Small, Medium (Medium and Large) and Large) 7 8 MSE/SSI Industry (Small, Medium and Large) 10 Share (%) Ind (Medium and Large) 11 MSE/SSI

12

1981-90 Average 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 1990-2000 Average 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2000-10 Average 2010-11 2011-12

59,056 1,16,301 1,25,592 1,51,982 1,64,418 2,11,560 2,54,015 2,78,401 3,24,079 3,68,837 4,35,958 2,43,114.3 5,11,434 5,89,723 7,29,215 8,40,785 11,00,428 15,07,077 19,31,189 23,61,914 27,75,549 32,44,788 15,59,210 39,42,083 46,11,852

21,152 8,541 44,508 17,181 47,090 18,150 58,636 20,026 57,865 22,617 74,672 27,638 93,053 31,884 1,02,604 35,944 1,17,530 43,508 1,30,516 48,483 1,47,319 52,814 87,379 31,825 1,62,837 56,002 1,72,324 57,199 2,35,168 60,394 2,47,210 65,855 3,52,304 74,588 4,59,232 91,212 5,79,429 1,17,910 7,25,646 1,32,698 8,85,393 1,68,997 11,05,051 2,06,401 4,92,459 1,03,125.6 13,91,747 2,29,101 17,06,683 2,59,191

29,693 61,689 65,240 78,662 80,482 1,02,310 1,24,937 1,38,548 1,61,038 1,78,999 2,00,133 1,19,203.8 21,88,39 2,29,523 2,95,562 3,13,065 4,26,892 5,50,444 6,97,339 8,58,344 10,54,390 13,11,452 5,95,585 16,20,848 19,65,874

16.65 14.64 7.99 21.01 8.18 28.67 20.07 9.6 16.41 13.81 18.2 15.86 17.31 15.31 23.65 15.3 30.88 36.95 28.14 22.3 17.51 16.91 22.43 21.49 16.99

17.32 14.65 5.76 20.57 2.31 27.12 22.12 10.89 16.23 11.15 11.81 14.26 9.35 4.88 28.77 5.92 36.36 28.94 26.69 23.09 22.84 24.38 21.12 23.59 21.29

16.79 16.32 5.8 24.52 -1.31 29.05 24.62 10.26 14.55 11.05 12.87 14.77 10.53 5.83 36.47 5.12 42.51 30.35 26.17 25.23 22.01 24.81 22.9 25.94 22.63

18.88 10.54 5.64 10.34 12.94 22.2 15.36 12.73 21.04 11.43 8.93 13.12 6.04 2.14 5.59 9.04 13.26 22.29 29.27 12.54 27.35 22.13 14.97 11.00 13.13

49.76 53.04 51.95 51.76 48.95 48.36 49.18 49.77 49.69 48.53 45.91 49.71 42.79 38.92 40.53 37.23 38.79 36.52 36.11 36.34 37.99 40.42 38.56 41.12 42.62

35.66 38.27 37.49 38.58 35.19 35.3 36.63 36.85 36.27 35.39 33.79 36.38 31.84 29.22 32.25 29.4 32.02 30.47 30 30.72 31.9 34.06 31.19 35.3 37.0

14.11 14.77 14.45 13.18 13.76 13.06 12.55 12.91 13.43 13.14 12.11 13.34 10.95 9.7 8.28 7.83 6.78 6.05 6.11 5.62 6.09 6.36 7.38 5.81 5.62

Source: RBI-Handbook of Statistics on Indian Economy, 2010-11 & 2011-12 Table-47, Table 48, Table-49; at www.rbi.org

capital projects, if not all but still a substantial portion. This would help them consolidate their economic foundation for long-term growth instead of meeting requirements of shortterm working capital or trade-related cash ows. However, this sudden spurt in term loans to MSE units over the past two years was a direct result of two factors: change in the denition of MSEs by including services sector in its scope for the rst time. Second, there was policy-enabled support to the MSE sector from all corners from the ministries of MSME and nance, RBI, Small Industries Development Bank of India (SIDBI) and commercial banks when it was realised, following the global slowdown during 2007-08, that the resilience of this crucial sector helped India overcome the aftershock of
Table 4: Distribution of Total Advances to Small Enterprises (SE) Term Loans in Total SSI Credit Outstanding (Rs crore)
Year Credit to SSI Term Loans to SEs % Share of Term Loans in Total SSI Credit

global economic deceleration at a time when the Indian corporate sector had suffered a setback.10
Credit to Manufacturing MSEs

2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

52,814 57,199 60,394 65,855 74,588 91,212 1,17,910 1,32,698 1,68,997 2,06,401 2,29,101

12,442 11,186 13,300 13,755 14,444 17,571 26,715 26,432 47,877 70,973 98,944

23.6 19.6 22 20.9 19.4 19.3 22.7 19.9 28.3 34.4 43.18

Source: RBI, Table 6.1 of Statistical Tables relating to Banks in India.

Table 4 shows that credit to the manufacturing sector did increase in absolute terms pari passu with the broad credit trend; and the major share of bank credit went to large/ medium-sized manufacturing units and declined in respect of the MSE sector. If one takes into account the lions share of registered manufacturing units in value addition to GDP, and the fact that the registered manufacturing sector took a larger share of bank credit, these details would reveal a substantially declining share of the unregistered sector, which consists generally of small and tiny units. Thus structural problems in the ow of bank credit have prevented income generation at the bottom of the pyramid leading to demand side constraints in the inclusive growth paradigm. Table 6 (p 109) shows a summary of ve-yearly simple averages of credit to industry by category from BSR data. It reveals that the number of industry accounts decreased substantially while outstanding credit increased since 1981. Even if a part of the value could be discounted against ination, there is an implication of consolidation of loan accounts instead of both consolidation and broad-basing. The absence of broad-basing is indicated by the share of manufacturing in total industrial credit which declined steeply from 90% in 1981 and 91%-92% in the 1990s to 66%-70% in 2009-10.
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cases increased substantially, indicating consolidation if not narrowing of credit to Financial Year Total fewer persons/units. However, relatively (April-March) speaking, the share of both these sections 1990-91 42,915 17,181 1,21,335 40.0 15.1 37.8 not only declined but became almost insig1991-92 45,425 18,150 1,40,396 40.0 15.0 37.4 nicant in terms of its share in overall 1992-93 49,832 20,026 1,45,950 40.2 14.3 35.5 manufacturing, both at the aggregate level 1993-94 53,880 22,617 1,84,710 42.0 15.5 36.9 as well as in rural areas (Table 6).11 There 1994-95 64,161 27,638 2,22,069 43.1 15.0 34.7 are reservations, if not limitations of such 1995-96 73,329 31,884 2,51,394 43.5 14.4 33.0 an exercise based on RBIs BSR data as it 1996-97 84,880 35,944 2,87,798 42.3 14.3 33.8 denes rural areas in terms of population 1997-98 99,507 43,508 3,25,196 43.7 15.1 34.6 but still the decadal change could also be 1998-99 1,14,611 48,483 3,75,127 42.3 14.9 35.2 1999-2000 1,31,827 52,814 4,29,162 40.1 14.1 35.1 interpreted as a parametric shift. 2000-01 1,54,414 56,002 4,82,749 36.3 13.0 36.0 Industrial credit to rural areas, classied 2001-02 1,75,259 57,199 6,20,055 32.6 11.8 36.3 as such under the denition of the popula2002-03 2,11,609 60,394 7,28,422 28.5 9.7 34.1 tion-based approach of RBI in BSR data, in2003-04 2,63,834 65,855 9,99,788 25.0 9.0 36.2 dicates a trend of absorption of cheap sur2004-05 3,81,476 74,588 28530 14,04,840 38.2 19.6 7.5 38.2 plus labour from agriculture while contain2005-06 5,10,738 91,212 34980 18,01,240 38.4 17.9 6.5 36.4 ing migration to urban areas. There was a 2006-07 6,35,966 1,17,910 48317 22,02,890 40.9 18.5 6.5 35.3 general decay of rural industries over the 2007-08 7,47,380 1,94,842 79344 26,02,290 40.7 26.1 8.8 33.9 years and decline in manufacturing activi2008-09 9,15,886 2,57,027 99432 30,40,007 38.7 28.1 9.9 35.2 ties. There could also be the possibility that 2009-10 11,38,406 3,62,291 149546 36,67,355 41.3 31.8 11.9 37.4 2010-11 13,43,970 4,85,983 189990 36,67,355 36.2 13.3 36.6 in each successive census, a large part of Note: The data on credit flow to micro and small enterprises has been taken since 2007-08 in place of small scale erstwhile rural areas gets transformed into industries with enactment of MSMED Act, 2006. semi-urban or urban areas. Still, despite Source: SIDBI and compiled from RBI-(1) Handbook of Statistics on Indian Economy, 2011-12 and (2) Report on Trends and Progress of Banking (various issues). the limitations of the BSR data, Table 6, However, credit ow to the MSE sector has shown a trend perhaps partially sheds some light to explain, even if in an reversal over the past three years and achieved a faster growth indicative way, why additional labour absorption in rural rate as compared to growth in credit to the priority sector as a village/SSI sectors did not pick up to prevent labour migration. whole and non-food gross bank credit. Credit to the MSE sector Credit to the rural manufacturing sector between 1996 and as percentage of total priority sector credit increased from 2008 (for which disaggregated BSR data is available) became a 17.9% as at the end of 2005-06 to 36.2% in 2010-11 (Table 6). trickle as khadi and other manufacturing activities declined. This leads to the question about structural issues in the role The other possible explanation could be the absence of scope of nancial intermediation in the Indian context in promoting of economic activities in less populated areas and remote areas economic growth through industrial growth and the cumula- (having a population below 10,000). Between 1996 and 2008, tive income generation potential. Although theoretically, as a the share of rural industries marginally declined from 8.7% in textbook economic possibility, it could be argued that bank 1996 to 6.7% in the sphere of outstanding credit amount; but credit can lead to income generation, if the former is deployed in the case of village/tiny manufacturing during the same in productive activities and poor people invest in projects period, it came down from 1% to 0.4% and in case of other that create a series of income streams over and above the cost of SSIs, the share went down from 2.2% to 0.55%. The above credit. But Indian eld realities do not sustain or substantiate observations seem to be in consonance with the estimate of such notions as one RBI evaluation concludes: RBI that for the last four nancial years, the share of credit
Table 5: Credit Flow under Priority/MSE Sector (Rs/crore)
Priority Sector Non-food Gross Credit to Credit to Small Scale Out of Bank Credit Micro as SSI/MSE as Industries/ SSI/MSE, (NFGBC) % of SSI/MSE % of Total MSE Credit to Micro Credit Priority Sector Credit to Total Priority SSI/MSE as Sector Lending % of Total as % of NFGBC NFGBC

The results show bidirectional causality running between bank credit and industrial growth and exports. The causality running from industrial growth to bank credit is more signicant than bank credit to industrial growth (RBI 2011a).

Table 6: Credit to Industry by Category Manufacturing, Village and Other Industries (Amount in Rs crore / Number of A/cs in lakhs)
Year Industry No of Amount A/cs O/s Mfg No of A/cs Amount* O/s Village and Tiny No of Amount A/cs O/s Other SSI No of Amount A/cs O/s

This also, perhaps, seems to substantiate the notion that banks could not fully deliver what was expected of them in their principal task of nancial intermediation in the desired sectors.
Credit to Rural MSEs

Another dimension to the paradigm of inclusive growth would also be apparent from the data relating to industrial activities in the rural areas. The number of accounts both in village and tiny sectors as well as the other MSE/SSI sector decreased steeply but the outstanding amount in both the
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1971 4 36 2 32 (88) 1981 10 140 9 134 (96) 1991 52 591 51 553(93) Average (1991-95) 54.2 768.4 53 711.8(92.6) Average (1996-2000) 47 1,650.8 46 1,520.2(92.1) Average (2006-10) 34 9,452.6 30.8 6,589.4(69.8)

26 27.6 21.6 4.8#

2 8 21

7 35 155

10 20.6 183.8 21.2 31.8# 18.4 278

4 246.8

* indicates percentage to industry. # indicates average for two years as BSR data was available for initial two years between 2006 and 2007. Source: RBI-BSR 2010 & various issues (compiled).

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ow to manufacturing MSEs declined from 55% as at end FY the service sector while the share of public sector banks was higher in the manufacturing sector. 2009 to 51% as at end January 2012. Table 7 indicatively shows that the number of industrial accounts in rural areas declined substantially while in semi- Non-Performing Assets urban areas they remained stable and in urban areas there Keeping in view the fact that MSEs had passed through a very was a substantial increase. Credit per unit of account in rural hard time in the wake of the global meltdown and in the areas was also the lowest. The share of tiny industries in overall present situation of continuing slowdown in the economies of credit to rural areas also declined; this is reected both in the Europe and the US, the non-performing assets (NPAs) in the decline in number of accounts and credits advanced. For economic MSE sector have remained within reasonable limit. As Table 10 initiatives in rural areas and fostering entre- Table 7: Population Group-wise Credit to Industry by Category in Rural Areas preneurship, this does not hold out any posi- (Amount in Rs crore/Number of A/cs in lakh) Year Industry Mfg Village and Tiny Other SSI tive implications for the future. No of Amount No of Amount* No of Amount No of Amount
A/cs O/s A/cs O/s A/cs O/s A/cs O/s

Credit Flow to MSE Sector by Category of Bank

Against the overall credit ow from scheduled commercial banks (SCBs) to the MSE sector, more interesting facts emerge when such credit ows to MSMEs are analysed on the basis of ownership of the banks. After the MSME Development Act, 2006 was enacted and particularly, since the year 2007-08, when the global nancial crisis affected the Indian economy, there has been an administrative thrust on the MSE sector by the government and the regulator. Under the priority sector dispensation, SCBs were encouraged and advised to increase credit ow to this crucial sector (Table 8) which had actually demonstrated resilience during the downturn when the corporate sector reeled under severe stress. Besides, outstanding credit to microenterprises showed a decline in FY 2011-12 as compared to FY 2010-11 while the majority of the MSE units nanced (approx 81%) are micro units despite a moderation in the growth rate in the number of accounts in micro units in FY 2011-12 as compared to FY 2010-11. Although, public sector banks were the largest nancers of MSE credit in FY 2011-12, they devoted the highest proportion of their credit (about 90%) to micro units compared to 64% by private sector banks and 88% by foreign banks in terms of the number of accounts. However, cross-section data showing the break-up of manufacturing and service sector units provided credit by banks classied by their ownership for 2011-12 (Table 9) shows that about 75% of bank credit from SCBs to the MSE sector was nanced by the public sector banks. Of the total MSE outstanding credit, SCBs contributed 47% and 51% to the manufacturing and service sectors respectively in FY 2011-12. Interestingly, private and foreign banks had advanced more loans to
110

Simple 5 yearly average (1996-2000) Simple 5 yearly average (2001-05) Simple 5 yearly average (2006-10)

21.5 16.4 10

125(17.2) 256.6 740.2

21.5 16.4 9

118.4(18.4) 214.8 491.2

14 9.5

9.8 15 **

6 4 **

25.8 14.8 **

Explanatory notes of BSR categorises places having population below 10,000 as Rural. However, since population groups are based on decadal census, there would be a parametric shift after each census (i e, 2000-01, 2010-11, etc). But, relatively speaking, still within the decade, there are some broad patterns despite such parametric shifts. * Figures in bracket indicates share in total. ** no data is reported in BSR Source: Basic Statistical Returns; RBI (various issues).

Table 8: Outstanding Credit to Micro-Enterprises vis--vis MSEs since FY 2008 (Rs crore)
FY Public Sector Banks Micro MSE Domestic Pvt Sector Banks Micro MSE Foreign Commercial Banks Micro MSE All Scheduled Commercial Banks Micro MSE % of Micro over MSE

2007-08 2008-09 2009-10 2010-11 * 2011-12 *

66,702 (44.13) 87,078 (45.49) 1,29,313 (46.80) 1,70,812 (46.24) 1,72,116 (43.43)

1,51,137 1,91,408 2,76,319 3,69,430 3,96,343

9,538 46,912 (20.33) 8,890 46,656 (19.05) 15,801 64,825 (24.37) 24,747 88,116 (28.08) 33,575 1,10,514 (30.38)

3,104 (20.04) 3,464 (20.17) 4,432 (20.96) 4,970 (23.67) 12,082 (55.52)

15,489 18,063

79,344 2,13,539 99,432 2,56,128

37.16 38.82 41.28 41.91 41.2

21,147 1,49,546 3,62,291 20,981 2,00,529 4,78,527 21,760 2,17,773 5,28,617

Figures in brackets are percentages. * Provisional. Source: RBI.

Table 9: Outstanding Credit to Manufacturing and Service Enterprises in the MSE Sector in FY 2011-12 (Number of A/cs in lakh) (Amount in Rs crore)
Type of the Bank Manufacturing No of A/c Amt Outstanding No of A/c Service Amt Outstanding Total MSE (including indirect advances) No of A/c Amt Outstanding

Public sector banks Private sector banks Foreign banks Scheduled commercial banks

11.28 2.17 0.48 13.93

2,04,315.95 (51.55) 38,042.38 (34.42) 5,882.80 (27.03) 2,48,241.13 (46.96)

59.43 20.41 4.77 84.61

1,87,691.61 (47.36) 67,918.70 (61.46) 15,866.87 (72.92) 2,71,477.18 (51.36)

71.29 22.62 5.24 99.15

3,96,343.22 1,10,513.6 21,760.01 5,28,616.83

Figures in parenthesis shows % total MSE. Source: RBI.

Table 10: Position of Scheduled Commercial Banks with Regard to Their Outstanding Credit to MSE Sector, Within That to Micro Enterprises Sector and NPA (Amount in Rs crore)
Name of bank Year Ended March Total MSE Micro Enterprises Amt O/s NPA in MSE % of NPA in MSE to Total MSE NPA in Micro % of NPA % of NPA Enterprises in Micro to in Micro Total Micro Enterprises Amt O/s to Total MSE

Amt O/s

Amt O/s

Scheduled commercial banks

Source: RBI.

2009 2010 2011 2012

2,57,361.08 99,431.98 3,64,001.01 1,49,545.82 4,85,942.58 2,00,528.93 5,28,616.83 2,17,772.96

13,944.59 20,067.09 21,258.54 26,312.99

5.42 5.51 4.37 4.98

8,035.76 11,885.34 12,686.96 13,078.82

8.08 7.95 6.33 6.01

3.12 3.27 2.61 2.47

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reveals, the percentage of NPAs in the MSE sector as a whole has increased from 4.37% in FY 2010-11 to 4.98% in FY 2011-12, whereas the percentage of NPAs in microenterprises declined marginally during the same period. This should be seen in the background of an increasing trend in substantial NPAs in the PSBs as a whole, particularly over the past two years. According to RBI data, gross NPAs of all SCBs was 2.4% in March-end 2009 which increased to 2.5% in 2010, 2.4% in 2011 and 2.9% in 2012. In absolute terms, gross NPAs in SCBs increased from Rs 2.78 lakh crore in 2009 to Rs 4.66 lakh crore in 2012 (which is 11 times of total NPAs in MSEs).
Assessing Risks of MSEs

through an integrated MSE loan policy as if it is a sovereign guarantee. This would further push credit to this desired sector as it would minimise the risk of the bankers to cover 75% of the project costs. This is simply because risk for collateral free loans are borne by the CGTSME, established by the government of India in the Ministry of MSME and operated through SIDBI.
4 Credit Gap and Measures to Improve Credit Flow to MSEs

One of the disadvantages of MSEs lies in their inability to bear risks; they face an adverse risk prole from the point of view of bankers. Presently, MSE category is a high risk option of bank credit and risk-averse bankers at branch and regional levels proceed with too much caution, which makes it difcult for MSE entrepreneurs to avail credit. Research carried out by the Centre for Analytical Finance (CAF) in the Indian Business School has shown that a large chunk of the nancing for SMEs, over 50% by some estimates, comes from non-bank, non-market sources. It has been argued that alternative nancing can bring down the costs through the three pillars high quality origination, orderly risk transmission and robust risk aggregation. The rst pillar requires credit assessors with in-depth local knowledge, who have the ability to judge a borrowers credit worthiness in the absence of detailed documentation as lack of documentation makes SMEs unattractive clients for traditional lenders. The second pillar requires building up local specic knowledge of SME businesses. The third is the requirement to build up investor condence in these new assets through responsible marketing and co-investment.12 Bankers generally take a people-and-judgment-intensive approach to risk proling of MSEs on the traditional criteria; therefore, decisions of bankers in advancing credit to MSEs are generally based on the traditional principle of the cash ow statement and capital track record (credit score, etc) and guarantee/collateral and even credit rating for micro and small enterprises. Such details of supplementary information are mostly neither maintained nor are they affordable as far as small units are concerned. The SME Rating Agency of India (SMERA) established by SIDBI has hardly reached any signicant penetration. The MSE Exchange, recently allowed by SEBI, has just started in a limited way. Therefore, the usual subjective credit risk analysis to assess credit worthiness of MSE business organisations often result in a negative attitude of a banker at the branch/region levels and often creates misinterpretation, misunderstanding, miscalculation and adverse comments. In order to overcome the difculties, therefore, risk assessment of small enterprises requires a separate set of tools as against conventional tools and needs innovative credit underwriting for MSEs. Besides, the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) Guarantee for collateral free loan now enhanced up to Rs 1 crore in deserving cases needs to be factored in the credit appraisal system
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According to the fourth census on MSMEs for the reference year 2006-07, only 5.18% (13.5 lakh units) of the total units (both registered and unregistered 261 lakh units) had availed of nance through institutional sources, 2.05% had nance from non-institutional sources, while 92.77% units had no nance or depended on self-nance. This shows a glaring credit gap and a rather poor ow of bank credit to this sector. The National Commission on Enterprises in the Unorganised Sector (NCEUS report, November 2007) had estimated the credit gap for micro enterprises in the unorganised sector at Rs 6.01 lakh crore (75%) as at end March 2011. A more recent estimate has been made by the IFC-Intellecap (2011) in November 2011 that the MSME nancing gap (both credit and equity) for the FY 2010 -11 was Rs 7.24 lakh crore comprising a credit gap of Rs 4.77 lakh crore (52%), and an equity gap of Rs 2.47 lakh crore (42%), which comprises only 0.1% of equity requirements. RBI had also mandated SCBs for achieving a 20% year-on-year growth in credit to MSEs and a 10% annual growth in the number of microenterprise accounts by all SCBs, out of which 60% of MSE advances should be achieved in respect of micro-enterprises in stages 50% in 2010-11, 55% in 2011-12 and 60% in 2012-13. Incidentally, the Prime Ministers Task Force had recommended for a corpus with the SIDBI, this out of the shortfall in the achievement of above target by the banks, as in the pattern of the Rural Industrial Development Fund (RIDF) maintained by RBI. It was estimated that this would facilitate an additional credit ow of over Rs 3 lakh crore to microenterprises from SCBs over a period of ve Table 11: Estimated Outstanding Credit years. But the target of this Supply of MSMEs (Rs crore) Financial Year Projected Supply of Credit Flow to specied road map stipuMSME Sector Working Capital Term Loan Total Supply lated by RBI was not fully achieved by the banks. It 2010-11 5,04,492 2,32,669 7,37,161 2011-12 6,00,255 2,74,227 8,74,482 was reported that the 2012-13 7,16,139 3,22,810 10,38,948 shortfall amounted to 2013-14 8,56,783 3,80,756 12,37,539 about Rs 53,000 crore in 2014-15 10,28,000 4,49,928 14,77,928 2011-12. The gap in credit 2015-16 12,37,094 5,32,566 17,69,659 of this sector in the course 2016-17 14,93,278 6,31,365 21,24,644 of the next ve years has Source: Planning Commission. also been assessed by the Planning Commission at more than Rs 21 lakh crore by 2016-17 (Table 11). The Ministry of MSME and almost all the MSME industry associations had been pressing RBI to x a target of about 10% of priority sector credit, as was the case of foreign banks operating in India till 2011 for MSEs, in line with agriculture (18%) and weaker sections (10%). The Committee on Review of Priority Sector Guidelines (Nair Committee)13 has recently also sought to enhance the credit ow to the MSME sector through a number of recommendations like a sub-target of 7%
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of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance-Sheet Exposure (CEOBE), whichever is higher, to be achieved in stages by 2013-14, achieving a minimum annual growth of 15% in the number of outstanding beneciary outstanding accounts for microenterprises.14 It had also recommended an enhanced mark of 40% of ANBC/CEOBE for the priority sector target in respect of foreign banks with special sub-target for MSEs and revision of denition of MSE under the MSME (D&R) Act, 2006 by recommending a doubling of the value of investment in respect of microenterprises both in the manufacturing and services sectors and raising the threshold for small manufacturing enterprises from Rs 5 crore to Rs 8 crore and small services enterprises from the existing level of Rs 2 crore to Rs 3 crore. While the regulator accepted other recommendations, it has not agreed to impose any xed target for MSEs. RBI has been resisting such a stipulation, perhaps on the logic that then there will be crowding out as there would be little legroom for pushing credit for other socially-relevant sectors. While this regulatory resistance may be justied under the existing Priority Sector Advances (PSA) policy, from a macroeconomic viewpoint, it should also be considered that MSE development indirectly promotes sustainable income distribution in the lower rung of the bottom of the pyramid. This is more so because most of the microenterprises are family rms in the unorganised sector where the principles of household economics, like subsistence agricultural farms, apply.15 This calls for a fresh review of the overall priority sector policy under the present changing economic scenario and existing structural bottlenecks.
Pushing MSME Credit Role of SIDBI and Banks

Under the existing scenario, banks are pushing credit to MSEs through a retail network of 96,000 plus brick-and-mortar branches all over the country under the priority sector lending target. Pushing credit to the MSEs requires professional skills in project evaluation and monitoring which, unfortunately, are rarely available at the branch level where such services are offered. Some banks have therefore resorted to the MSME hub system where the assessment is done on a predetermined basis of project evaluation that not only misses the typicality of the individual entrepreneur but often results in routine assessment and delays. SIDBI, on the other hand, is a specialised institution with required professional competence for evaluation and monitoring of such project proposals. But against the vast branch network of banks, SIDBI has only 86 branches at present to promote credit dispensation to MSEs. Given its limited reach, there does not appear to be any reason why SIDBI should be allowed to push MSE renance through banks with the help of cheaper RIDF16 allocation at a higher rate after retaining its agency commission. On the other hand, SIDBI has been fairly successful in innovating crucial nancial products. It has successfully developed and implemented a CGTMsE with nances from the MSME Ministry itself for granting loans up to Rs 1 crore without collaterals. This has resulted in positive effects on credit dispensation to MSEs by banks who, despite their bias
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towards risk aversion, have found CGTMSE attractive enough to push MSME loan products. SIDBIs Venture Capital Fund, credit rating agency for MSEs called SMERA, and efforts at creation of special SME exchange in NSE have made a positive contribution to the MSE sector. There is at present a sort of void in understanding and stipulating what exact role SIDBI should play for the MSE sector in the future. Given its limited reach but unique specialisation (it has a professional talent pool), perhaps SIDBI could be allowed to concentrate on product innovation for the MSE sector as a whole; its direct lending to MSEs could be phased out to banks in a planned manner. All its 86 branches and qualied professional talent pool could be integrated to the banking sector as a knowledge hub and a loan processing, evaluation and monitoring hub for the banks that lack such expertise at eld levels in the wake of the planned demise of specialised nancial institutions like IDBI, IFCI, ICICI, etc. SIDBI could also be utilised as a training institution focusing on project evaluation, credit dispensation and monitoring, which will empower branch managers with such knowledge and skills at the eld levels in a professional manner. There is also a great need to change the present mindset on the benchmarking of achievement of regulatory targets and government guidelines for chairpersons and managing directors (CMDs) in banks in order to address the contradictions that have crept into the way leaders of banks are evaluated for their performance. There is an urgent need to factor in the achievement of targets in crucial sectors like MSEs into the performance matrix of the executive directors and CMDs of banks. At present, the performance of the top leadership and their incentives are built on SOI (Statement of Intent) parameters. Unfortunately, achieving targets in MSEs is not among the performance matrix. What happens then is that there is no compelling or self-propelling reason for the leaders to showcase their performance in sectors like MSE.
5 Conclusions

This paper started with the fact that after 1991, both the industrial and banking sectors in India were liberalised in varying degrees and in varying phases, heralding a marketdriven agenda with a prot motive. It has also referred to the presumption that the Twelfth Plan will promote inclusive growth and employment through agriculture and industry, and within the industrial sector, the manufacturing MSE sector in particular. It was felt that the desired levels of growth in the MSE sector would become possible when such industrial activities are supported by enhanced nancial intermediation through banking channels. Our analysis shows that, despite a robust credit growth, the actual level of nancial intermediation in the post-reform period of the last two decades in the industrial sector and within industrial sector, MSEs and manufacturing MSEs in particular does not support any notion of increased industrial nancing despite the need for an enhanced role of bank-led nancial intermediation for the MSE sector. Our study shows that credit growth was buoyant but growth of credit to the MSEs decelerated. Credit became costlier to MSEs
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relative to what companies in the private corporate sector had to pay; its ow declined to a third and its composition changed. Credit to microenterprises underperformed and its ow to the MSE manufacturing sector as a whole and to rural manufacturing units declined. The structural bottlenecks in pushing credit to this crucial labour-absorbing sector have resulted in what could be called credit retrogression. There is no clear road map to show as in the case of other south-east Asian economies like South Korea, Thailand or China how the industrial growth rate of 12% per annum, envisaged during the Twelfth Plan period (and as also declared by the NMP 2011), could absorb an additional 100 million people. Interestingly, over the years, the corporate sectors dependence on bank credit has declined while the MSME sectors demand for bank credit has increased. RBI credit data (RBI 2010; 2011b) shows that presently the private corporate sector accounts only for 44% of bank credit compared to 69% two decades ago. In reality, the corporate sector has the ability to raise required funds from the capital markets and, therefore, it is less dependent on banks for credit. Small industries in the organised sector and the tiny ones in the unorganised sector, on the other hand, do not have such access. They fully depend on bank credit and trade credit to meet their requirements. But the paradox is that although the NPA levels of MSE segment has been reasonably stable within the priority sector banks nd MSE credit rather sticky and risk prone. Some studies have estimated that the differential rate of interest between large and small borrowers have been 2% (Sen and Ghosh 2005). But in actual practice, the difference could go up to 3% to 4%. This is the case when banks, and public sector banks in particular, extend bulk credit to the corporate and
Notes
1 Industrial policy reforms started in 1984 came with comprehensive nancial sector reforms in 1991-92 comprising banking sector reforms, capital markets and external sector reforms, etc. 2 Prior to the enactment of MSME Act of 2006, this sector was known as Small Scale Industries Sector. Till recently, RBI maintained its database as SSI sector before changing to the new nomenclature because of continuity of data and keeping in view the minor differences in denitions. 3 The manufacturing sector accounts for about 16% in Indias GDP with a share of 11% in total employment compared to other emerging economies like China (43%), Indonesia (26%), Malaysia (25%) and Thailand (35%). It also accounts for about 64% of Indias total exports (2009-10). Recently, a National Manufacturing Policy (NMP) has been approved, which is expected to increase the sectoral share of manufacturing in GDP to at least 25%, create 100 million jobs by 2022 and enhance the global competitiveness of the sector. See National Manufacturing Policy (NMP 2011). 4 The specic choice of the manufacturing sector has been driven by its predominance (74% weight) in the Index of Industrial Production (IIP) and its major role in employment generation, so crucial for inclusive growth envisaged in the Eleventh and Twelfth Five-Year Plans. 5 Ministry of MSME data is available last for the year 2007-08 in their Annual Report of 2011-12.
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large business houses at lower than market rates in order to meet their credit targets, mostly at the end of the third and fourth quarters of the nancial year.17 The underpricing of bank credit in favour of the corporate sector is not, however, based so much on the perception of risks as textbook economics would have us believe, but on the risk aversion of bankers, relative economy and ease in bulk-lending as well as familiarity with the proles of big-ticket borrowers compared to the unknown multitude of small-ticket MSE borrowers spread all over the country. This brings us back to the persistent doubts raised over whether reforms have resulted in improved credit dispensation after 1991. As our analysis of credit data shows, it is perhaps structural bottlenecks constricting credit to the MSE sector that have caused credit retrogression. In the post-liberalisation period when PSBs were given autonomy to adopt commercial logic and, as the Narasimham Committee wanted, change their social orientation into one driven by prudential norms and the prot principle, scheduled commercial banks, and PSBs in particular, have shied away from ensuring a more balanced credit overdrive. However, as the necessity of nancial inclusion gathered momentum, particularly after 2010, credit push to the MSE sector is being accomplished by regulatory and administrative directives.18 Had there been credit market forces in operation, bank credit should have gone to the highest interest paying segments, MSEs being one such sector in the retail segment. But this has not happened. On the other hand, there was a decline in SME credit ow relative to other sectors. All this goes contrary to the spirit of liberalisation which promised the establishment of a market signal-based credit dispensation model for Indian banks.
(1) under the cover provided by the Credit Guarantee Trust for MSEs (CGTMSE), 75% of such risks are borne by the government of India, which is akin to a sovereign guarantee, and (2) NPAs in the MSE sector are relatively lower than in the large corporate sector notwithstanding higher mortality of MSEs in business downturns. 9 These are also corroborated by the observations available in the Report on Currency and Finance on Progress of Banking in India (200608) as well as in various annual issues of Trend and Progress of Banking in India. 10 Historically, MSEs face a large number of problems in accessing bank loans non-availability of sufcient collaterals, delay in sanctions/disbursement, high cost of funds, delay in payments, lack of reliable information and credit history, apart from their poor performance. Ministry of MSME and SIDBI took a slew of measures from extending subsidies, grants and other supporting services. Some of the credit enhancing measures included additional re nance of Rs 7,000 crore from RIDF through SIDBI at a cheaper rate, increasing cover under the Credit Guarantee Scheme (CGTMSE) for the MSME sector, and extension of factoring services by SIDBI for MSME units. RBI also issued special guidelines. Out of the total credit dispensation to the MSME sector, credit to tiny units would be earmarked on a graded scale for three years 50%, 55% and 60% in rst, second and third years, respectively to be achieved by March 2012.

It shows that the share of SSI in total exports of the country was 30.8% in 2007-08. It also shows that the rate of growth of exports from the SSI sector had considerably slowed down in 2007-08 to 10.67% from 21.50% in 2006-07 and the number of registered MSMEs was 15.64 lakh comprising 67% manufacturing and 33% services enterprises. 6 Till the time banks switched over to the bank rate (BR) regime in 2010-11, 77% of bank credit was deployed below BPLR and its major share went to the corporate sector. One of the major reasons could be that banks did not nd enough viable/safe projects for lending despite having adequate funds as would be evident from the following: (1) Banks had a continuous surplus of lendable resources but did not have appropriate investment avenues. In 85 months (between March 2003 to April 2010), banks deposited their surplus in reverse repo for 65 months. (2) The average statutory liquidity ratio (SLR) of banks was much higher (at 40%) as against the mandated requirement of 25%. See Chandhok (2010). 7 Apart from the orientation of individual bankers at branches, there are two important reasons for this risk aversion. High pre-existing NPA levels coupled with stringent prudential norms leads bankers to safer credit avenues. Added to this, there are issues of asset-liability mismatch as banks relying on short-term funds avoid advancing longer term credit lines. 8 One of the reasons could be that the MSE sector as a whole is still being perceived by banks as having a higher risk prole despite the fact that
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11 According to BSR, habitations with a population of less than 10,000 are rural areas. As population grows, cities expand, mass migration takes place and rural areas become more and more distanced from mainstream lifestyles and infrastructure. That is one of the reasons why in every census year, after 10 years, there is a quantum jump. But despite its limitations, this crucial data reveals the economic neglect of the distanced population which affects the potential growth of local enterprises. Besides, the BSR criterion remaining the same, decadal change could also be treated as a parametric shift for the purpose of interpretation. 12 See www.isb.edu/caf/ 13 See Report of the Committee to Re-examine the Existing Classication and Suggest Revised Guidelines with regard to the Priority Sector Lending Classication and Related Issues (Chairperson: M V Nair), February 2012. www. rbi.org.in 14 In case of failure to achieve targets of both direct and indirect credit to agriculture, banks are required to deposit a certain portion of their deposits, under a stipulated formula, in RIDF, administered by NABARD, at a rate lower than the cost of acquisition of funds by banks. In the recent Master Circular on Priority Sector of 2 July, RBI has done away with RIDF provisions for foreign banks for non-achievement of 10% MSE target. 15 For a comprehensive view, see Paivi Mattila Wiro (1999). 16 Transfer of cheaper funds from RIDF accretions to SIDBI on account of shortfall in MSME target of 10% to be achieved by foreign commercial banks under their priority sector lending was rather small as the overall target of foreign banks remained below 5% of the total credit disbursed by all scheduled commercial banks. However, after the global economic crisis in 2008, SIDBI was given substantial funds from RIDF, about Rs 23,600 crore between FY 2009 to FY 2012 for renancing the banks and nancial institutions. This included Union Budget provisions of Rs. 5,000 crore each for the last two nancial years from RIDF for renancing activities. 17 It is only after 2010, in the wake of the recommendations of the Khan Committee looking into BPLR issues when banks switched over to a system of holistically determined the Base Rate and tightened sub-BR lending norms to 5%, that sub-BPLR lending has come down. 18 This also opens up the recent debate raised by Michael Sandel over the fairness principle guided by utilitarianism and rank commercial logic of the free market under libertarianism. One could perhaps argue that in post-liberalisation India, as markets were gradually freed from government control (that rested on the moral principle of protectionism to ensure fairness), credit should have own to the sectors that signaled the highest rate. See Sandel (2010). Mufsa, Chironga et al (2012): Micro, Small and Medium-sized Enterprises in Emerging Markets: How Banks Can Grasp a $350 billion Opportunity, McKinsey & Company. Mehta, Swati (2011): Economic Reforms, Technological Intensity and Industrial Development in India, Economic & Political Weekly, 23 April. Mohan, Rakesh (2005): Financial Sector Reforms in India: Policies and Performance Analysis, Economic & Political Weekly, 19-25 March. NMP (2011): National Manufacturing Policy, at www.dipp.nic.in. Paivi, Mattila Wiro (1999): Economic Theories of the Household A Critical View, Working Paper No 159, The United Nations University, WIDER. Panagariya, Arvind (2011): Redistribution is Not Inclusion, Economic Times, 19 October. Rangarajan, C et al (2011): Where Is the Missing Labour Force?, Economic & Political Weekly, 46(39): 68-72. Reserve Bank of India (RBI): Basic Statistical Returns of Scheduled Commercial Banks, various issues. Statistical Tables Relating to Banks in India (various issues). (2010): Report on Currency and Finance, 2006-07. (2011a): Trend and Progress of Banking in India, 2010-11. (2011b): Handbook of Statistics on Indian Economy, 2010-11. (2012): Handbook of Statistics on Indian Economy, 2011-12. Sandel, Michael J (2010): Justice Whats the Right Thing to Do? Penguin Books. Sen, Sunanda and S K Ghosh (2005): Basel Norms, Indian Banking Sector and Impact on Credit to SMEs and the Poor, Economic & Political Weekly, 19 March. Trivedi P et al (2010): Productivity, Efciency and Competitiveness of the Indian Manufacturing Sector, DRG Study No 37, at www.rbi.org

References
Bhattacharjee, S and D Chakrabarti (2013): Financial Liberalisation, Financing Constraint and Indias Manufacturing Sector, Economic & Political Weekly, 9 February. Chandhok, B L (2010): Credit Flow A Structural View, Indian Banker, September. Central Statistical Organisation (2009): Fourth Census of MSME Sector, September. Dholakia, Ravindra H (2012): Prospects for Indian Economy, Vikalpa, Vol 37, No 4, OctoberDecember. Gokarn, Subir (2010): People, Jobs and Productivity: The Simple Dynamics of Inclusive Growth, Keynote Address on 26 March 2010 at CII Western Regions Annual Regional Meeting and National Conference on Achieving DoubleDigit Growth.

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