Smes Require Urgent Attention

SMEs REQUIRE URGENT ATTENTION: B. YERRAM RAJU* The global economic crisis is delivering a new script in financial engineering. In an anxiety to resurrect the economies in difficulties we reopened the Keynesian economics. Fortunately for India, which is outside the ring of the whirlpool, Government of India and the Reserve Bank of India have identified liquidity crunch as the problem to be attacked and have injected Rs.280000crores and thanks to the accounting gimmicks, head line inflation is made to look southwards while in reality the common man did not see any of his normal consumables and condiments available at prices lower than June 2008 prices. RBI eased prudential norms for sensitive sectors like the capital markets and real estate. There is one sector which lacks lobbying and clout – the SME sector. Even in the midst of extensive home and real estate lending period, dependent SMEs were languishing for credit as revealed by the most disappointing RBI’s latest Mid-Term Monetary Policy Review in terms of which, credit for SMEs declined in absolute terms from 31 percent in August 2007 to 9 percent in August 2008 and for Transport Sector from 44 percent to 27.5 percent for the priority sector. TELCO and Ashok Leyland moved to five shifts a week with export markets declining. Lakhs of SMEs in the Auto Component sector, Foundries were asked to stop supplies. Stocks are piling up. SMEs are not able to lay off the employees as their elder brothers did or could enter into a negotiated settlement for reduced wages in an island of riches unleashed by the Government implementing Sixth Pay Commission wages and salaries in sectors that progressively deteriorated in their contribution to the GDP. Credit is choked up in the name of growing NPAs in the SME sector. It is time to look at ways of pump priming the demand for manufacturing sector. All States have Road Transport Undertakings running aged fleet of vehicles that are contributing to pollution. Government of India could pump equity to replace all such vehicles that would pump prime the demand for buses and trucks domestically. This would enable the Truck and Bus manufacturers to work at least fifty to sixty percent of their capacities in the near term and eventually pump in oxygen into the dependent SMEs that are otherwise sinking. Second, the RBI should immediately change the prudential norms for the SME sector. All outstanding credit to the March-end/pre-crisis well-functioning SMEs should be converted into interest-free long term loan with a gestation of twelve months. Fresh working capital should be granted at flat 8-9 percent per annum in tune with the fresh projections of cash flows to be submitted by the enterprises without any additional collateral security. All Enterprises within the reworked out consolidated limits of Rs.100laks should be covered by the CGTMSE scheme under their recently announced shared collateral mechanism with their Member-lending Institutions as a rule so that the provisioning norms would automatically be eased for such enterprises. In respect of Export-oriented SMEs affected by contraction of overseas demand, all payments held over in the pipeline or affected by currency crisis should also be given

reprieve by the Banks on case to case basis. Pharmaceuticals, Electronics, Auto Components, Gems and Jewelry, Textiles and Ready Made Garments, Sweat Garments are all under such category. GoI should postpone collection of all taxes by at least another six months subject to review thereafter from the SMEs. All these facilities should be made applicable only to those enterprises which do not lay off the employees. Government of India under its Market Development Assistance should encourage the SMEs wanting to explore new markets overseas through sponsored exhibitions, extensive education, extension services and technology transfers. Banks should be enjoined upon to treat all branding, co-branding, IPR and marketing costs as capital expenditure and to grant Term Loans with at least 24 months gestation for such purposes. These measures do not brook delay as the ability of SMEs to tolerate cash losses simply does not exist. I am sure, Government keen on ensuring at least 7 percent growth would move swiftly in this direction. _______________________________________________________________________ __*Dr Yerram Raju is Regional Director, PRMIA-Hyderabad Chapter and leading SME consultant. Can be reached at [email protected]