Opinion Financing the small guy

An RBI group wants bank managers not to insist on collateral from small industrialists for loans to them.

New DelhiMarch 10, 2010 04:47 PM IST First published on: Mar 10, 2010 at 04:47 PM IST

An RBI group wants bank managers not to insist on collateral from small industrialists for loans to them. This has been exhorted before and not worked. A small rule-based reform will work. Bank managers are careful people. Ministers and others ask them to do things and go away. But if they lose other people’s money,their inspectors breathe down on them. So they play safe,and thank god,we would say as depositors.

When I was V-C,JNU,I wanted banks to give loans to some of my students who came in after intense competition between tens of thousands of kids and would get jobs after graduation. But the managers wouldn’t bite. I told them,”The FM has said you must give loans to the daughter of a landless labourer from Andhra who beat the entrance exam and is now in.” They said,”Sir,the FM does not help us when Head Office catches us.”

So,how do other countries finance the small businessman better than us?

I would ask for automaticity in the implementation of policies,which lead to easing financing constraints for the SME sector to which the government and all of us are committed,in which progress is not up to expectations,clear to anybody who visits really small enterprises. In 1989,the President of South Korea had sent an emissary to Prime Minister Rajiv Gandhi arguing that their analysis showed that the 90s was going to be a decade of India and they wanted to diversify their triangular relationship with Japan from where they imported 21 billion dollars and the USA to which they exported 29 billion dollars. They wanted Indian policymakers to visit South Korea to see their strategic policies. I was asked to lead a team consisting of the then Industry Secretary,Smt Bordia and Dr Montek Singh Ahluwalia,who could not come. In conversations which I have reported in academic debates and which has been extensively quoted in the literature on strategic planning,I was told by the architect of their growth story not to worry about comparative advantage,but to implement what you plan well. Efficient import substitution and export promotion went hand in hand. The Koreans made and implemented rule-based policies which did not allow any intervention or failure. As soon as an export order was received,by pre-determined norms developed by their Planning Board,the industrial unit was given in its bank account the set-offs,of both for an actual export as well as a deemed export.

Our credit systems and priorities for small industry are detailed and comprehensive. I would suggest the following two steps:

1. As soon as an order is received by a small enterprise,the bank is required to give a certain percentage predetermined by the Government in the department of Small Industry to the unit,a loan for working capital.

2. As soon as the consignment is delivered to the unit ordering at home or abroad,with a proof of landing,a fresh loan is given to the unit based on norms decided by the Small Scale Industry department and the loan for working capital is subtracted from it.

The loan is liquidated as soon as the payment is made by the customer. One out of ten thousand cases is investigated by the Special Enforcement Branch created by the Department of Small Scale Industry and if any enterprise is found cheating,it is given severe punishment. The Department of Small Scale Industry also arranges reinsurance scheme for default.

More than four fifths of small industry do not get credit from banks as a number of studies show. They are the backbone of our competitive strength. We must cover the last mile for them.