The Hindu Business Line : Small enterprises need big push

The problems faced by small enterprises have been persisting for over four decades now. The policy focus henceforth should be not merely on certain key issues for sustained growth of these enterprises, but also on providing a safe exit route for the unviable ones, says B. YERRAM RAJU.

Tackling sickness among small enterprises must be addressed quickly.

Though small enterprises as a whole have performed well in recent years — in terms of production, exports and, in some cases, even outperforming large industries on key indicators — there are variations in performance levels across sub-sectors.

When the Sick Industrial Companies (Special Provisions) Companies Act, 1985 was enacted, it did not consider it expedient to look at the type of issues and problems afflicting the large enterprises that would have an impact on their vendors, namely, the small enterprises. This law has been scrapped, but its relics remain.

Growing on support

Since the 1960s, the growth of small enterprises has been largely dependent on government — both Central and the States — and the large enterprise sector. This gradually led to problems of ineptitude and inefficiency, resulting in undeclared closure of units , and declared but unrecognised bankruptcies. Therefore, growth of small enterprises acquired different hues.

About a third of small industries at the all-India level are classified as “sick.” According to the third All-India Census of SSIs 2001-02, 11 States account for 89 per cent of the sick units and in nine of these States, 69 per cent of these units are closed. These numbers are of units that have entered the books of the financing institutions. There are many which have not borrowed but turned sick, with assets such as land and machinery idling for decades. A rough estimate of such assets in the industrial estates alone would be 5-6 per cent of the GDP.

The States ranking high on the ‘sickness’ list are Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Punjab, and Maharashtra. Sub-sectors face specific problems, and vulnerability to global competition also varies significantly across the sub-sectors.

Persisting problems

The problems common to small enterprises as a whole and persisting for over four decades include insufficient demand, lack of access to finance, non-availability of raw materials, inadequate and high-cost infrastructure, low technological up-gradation capability (again for want of financial support), poor marketing, non-adherence to international quality standards and inadequate business-related information.

Information asymmetry and adverse selection stare at both the bankers and entrepreneurs in equal measure. Broadly two types of policy measures have contributed to the growth of small enterprises.

The first relates to upfront or backend subsidies depending on the development thrust — either specific sectors or specified backward areas.

And, second, regulatory and procedural facilitation. Direct intervention in the credit market did some good no doubt, but it has also engendered the growth of unhealthy species, with banks queuing up to lend to certain sectors leading to avoidable risks in the portfolio.

Today, the general environment has changed and banks and financial institutions have become choosy to the point of almost ignoring the sector.

Changed environment

The RBI’s Annual Reports on sickness and rehabilitation indicate that despite redefining sickness and reformulating guidelines for rehabilitation, banks are averse to take on this task.

Even after a number of studies and attempts on the part of the RBI, resulting in formulation of certain guidelines for reviving the sick but potentially viable enterprises, rehabilitation has largely remained on paper.

Banks, in the meantime, as part of the reform process, have moved to revised asset classification according to which units that fall in arrears of payment of either principal or interest for 90 days or more will be treated as non-performing.

The definition of sickness as in the Kohli Committee report has lost its relevance. A need, therefore, arises for a detailed study on the current status of sick small enterprises and those on the brink of collapse.

The Finance Minister in the 2005 Budget announced the MSME Development Act 2006 and an agenda for development. But the issue of tackling sickness among micro and small enterprises has not be addressed adequately.

At a time when the economy is on the upswing, with GDP growing at over 9 per cent and the manufacturing sector at 11-12 per cent, it would make lot of sense to base policies for small enterprises on a solid foundation. First, ABC analysis of the chronically sick should be done with treatment coming in the form of legal proceedings and on the basis of administrative exigency.

Second, for the potentially viable ones, retrieval should not be a problem if the required inputs are pumped in. But this should be done within reasonable time.

Third, those in incipient sickness category, the solution must be appropriate for both the Government and the financing institution as well; the delivery of solutions should again be time-bound.

The assets locked up in small enterprises should be released in the quickest possible time after identifying them as sick or potentially viable so that factor productivity does not become negative. And this calls for examining the prospect of a sound Exit Policy with proper regulatory framework.

Policy direction

Therefore, the policy focus has to be not merely on certain key issues — for sustained growth of small enterprises, raising total factor productivity and price competitiveness, ensuring quality standards and facilitating export growth — but also on providing a safe exit route for the unviable and losing enterprises. And this calls for:

Recognition that enterprises have their inevitable failures (even the top 500 companies in the world are never the same every year);

Acknowledging the fact that some of the failed entrepreneurs do have the urge to restart their enterprises with a new agenda or in a new shape after drawing lessons from their failure;

Ensuring that the sickness does not assume epidemic proportions; and

Legal recognition of bankruptcies among small enterprises so as to facilitate exit.

All developed nations have bankruptcy laws that define the exit rules.

Hopefully, Budget 2008-09 will unleash policy initiatives in this direction.

(The author is an SME consultant and Regional Director, PRMIA, Hyderabad Chapter.)