Namrata Kath Hazarika | 20 Oct, 2009
Although MSMEs is playing a pivotal role in the development of the Indian industry, T. R. Bajalia, Executive Director, IDBI Bank believes that MSMEs still need to focus on improving their competitiveness by investing in state-of-the-art technologies, systems, human resources along with introducing best global practices and must concentrate on quality products that would be internationally competitive at a comparable price, to face the competition from within and outside.

Excerpts of the interview...

The problem of credit crunch is jeopardizing the growth of the Indian MSME sector. What is your reaction on this?
T. R. Bajalia: The SME sector is playing a pivotal role in the development of the industry in the economy and is said to be the growth driver of the Indian economy. SMEs contribute 35-40% to the nation’s GDP and account for more than 90% of all industrial enterprises in India SMEs also contribute to 45% of industrial employment and 35% of total export. SME Advances form a significant share of major private/ PSU banks. Most of the SMEs in the past were relying on owned funds or informal channels of finance as alternate sources for medium to long-term funding in view of their inherent inability to access the formal channels of finance such as Banks and Financial Institutions. Delayed suppliers' payment, has resulted in need for enhanced working capital. There is an imperative need to enhance the availability of credit to the SMEs. Enhanced working capital support from the banks, by way of enhancement of cash credit limits with lower margins for the working capital requirements, would go a long way in mitigating the hardships faced by these units. The reforms in the financial sector have considerably increased competition in the banking industry and today there is no dearth of funds for credit worthy proposals. In fact, we feel that all the banks are today chasing good borrowers.

What kind of action plan will enable MSMEs to avail the finance from the Banking system?
T. R. Bajalia: The MSME units who have set up better accounting/ financial reporting systems are well positioned to take advantage of available opportunities in the financial markets. In addition, a sound business plan and well-articulated strategy would go a long way in convincing the lenders and other stake-holders to take a positive view of the enterprise.

As we are talking of having inclusive growth in the country, what according to you will be the role of MSMEs for achieving inclusive growth in the country?
T. R. Bajalia: World over, the Small and Medium Enterprises (SMEs) are recognized as an important sector owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship, provide depth to the industrial base of the economy by inclusive growth. India has a vibrant SME sector that has played an important role in sustaining economic growth, increasing trade, generating employment and creating new entrepreneurship in India. Small and Medium Enterprises (SMEs) are an important ingredient for stable and equitable growth in any national economy. It forms the backbone of Indian manufacturing sector and has become the growth engine of Indian economy. Thus SMEs would play a crucial in achieving inclusive growth for the national economy. The Micro sector needs the financial inclusion as a major part of these entrepreneurs continue to be outside the banking relationships.

Despite a recent directive from the Reserve Bank of India (RBI) to the banking sector that funds of up to Rs 5 lakh should be made available to MSMEs without collateral, many MSMEs still find it difficult to raise funds. What is your take on this?
T. R. Bajalia: Reserve Bank of India's (RBI) directions in regard to Advances of up to Rs.5 lakh clearly mention that no collateral security be insisted for these loans. I feel that all PSU Banks comply with the regulatory guidelines issued by RBI from time to time. IDBI Bank has issued strict guidelines to its branches on the subject to ensure that no credit worthy proposals from Micro and Small Enterprises are deprived from its genuine financial needs.

Are you planing to structure the interest rates for PLR as of now?
T. R. Bajalia: IDBI Bank’s loans to MSMEs are linked to the Benchmark Prime Lending Rate (BPLR). The Rate of Interest (RoI) on a particular proposal is decided on the basis of Credit Rating of the borrower besides the prevailing conditions in the money market. However, all Advances up to Rs.2 lakh are charged RoI of not exceeding BPLR. IDBI Bank had recently reduced its BPLR by 50 bps to 12.75% per annum. BPLR of the Bank is reviewed by the Assets Liability Committee (ALCO) of the bank from time to time and reset depending upon the overall direction of interest rates in the economy.

Industry bodies and industry stalwarts have been consistently demanding 6 percent net bank credit to micro enterprises in the country. What is your reaction on this? Can we expect IDBI bank lending credit at 6 percent?
T. R. Bajalia: Various measures announced by Reserve Bank of India (RBI) and the Central Government have been prompting the banks to increase their exposure to Micro and Small Enterprises. In fact there is already a regulatory sub-target communicated by RBI to banks which states that 60% of Bank’s Advances to small enterprises should be granted to micro enterprises.

With the entry of an independent third party evaluator (Credit rating agencies), what is the projection of growth for the MSME sector? What is this credit rating agencies and how will it help SMEs in particular?
T. R. Bajalia: Growth in the SME sector has progressively increased year after year, and the current growth is estimated at an encouraging 12 percent per annum.

Credit rating provides a credible basis of evaluation. These are neutral assessments of the SMEs' credit worthiness. With the Basel II norms becoming applicable to banks soon, credit rating agencies would play an important role in facilitating the lending process. SMEs have begun to realise that getting a rating from an independent agency helps in getting bank funds at a slightly lower rate of interest and it gives the lender a higher level of comfort. A good rating has also helped some companies to boost their image and secure more business.

CRISIL and SMERA have been providing credit ratings that are comprehensive, transparent, reliable and facilitate easier flow of credit from the banking sector to SMEs. Companies which were not necessarily financially savvy but performing well could use their ratings and the accompanying detailed reports to negotiate more effectively with banks. The demand for ratings, as revealed by the trend in the number of companies rated, has been growing. Banks also maintain a positive outlook towards SMEs that come armed with credit ratings; they feel these ratings are effective and come in handy while assessing an SME and its monetary requirements.

The trends, on the other hand, suggest that if SMEs need to explore options for accessing equity and non-debt finance to scale up and improve their financial management, credit ratings can be of help.

Do you think that with the advent of the SME stock exchange in the country, banks will face a tough competition as many SMEs will depend on this new platform for raising capital/ funds?
T. R. Bajalia: The proposal for setting up an SME Exchange of India was examined by Securities and Exchange Board of India (SEBI) and later on SEBI issued the regulatory guidelines for setting up of SME Exchanges. An SME Exchange can play a significant role in channelising capital market funds to SMEs and would be welcomed by one and all. It would also bring about a discipline and transparency in the operations of MSMEs who are seeking to raise funds from public. I feel it would be a healthy market development in the long run.

What are the IDBI's strategies for expanding the banking facility in the country and reaching out to the untapped areas and locations for establishing banking set up?
T. R. Bajalia: IDBI Bank’s vision is to become the fifth largest Bank in the country by the year 2012. The bank is continuously and rapidly expanding its branches and distribution network all over the country with focus on hitherto untapped areas. We believe that rural hinterland and semi-urban locations offer tremendous opportunities for banking services and inclusive growth.

What is your message to the MSME sector in general?
T. R. Bajalia: I believe MSMEs should focus on improving their competitiveness by investing in state-of-the-art technologies, systems and human resources and introduce best global practices and must concentrate on quality products that would be internationally competitive at a comparable price, to face the competition from within and outside.