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Big bang for small firms
- Loan burst in tag rejig

New Delhi, Aug. 10: Finance minister P. Chidambaram today declared that all industrial units with investments of up to Rs 10 crore in plant and machinery will be deemed medium enterprises. He backed that up with an order to state-run banks to lend up to Rs 81,000 crore to these units in the current financial year.

The fresh directive widens the scope of an earlier order under which more loans were to be shovelled into this sector. Medium enterprises, not just small units, will benefit now.

This is a break from the government’s credit policies, which had so far concentrated on manufacturing units in the small-scale sector. However, the lowering of trade barriers across the globe increased the minimum viable size of enterprises.

Chidambaram said the definition of small-scale “needed to be revisited” and the policy should include services and trade.

“In keeping with the global practice, there is also a need to put medium enterprises into the composite sector of small and medium enterprises (SME). A comprehensive legislation enabling the paradigm shift from small-scale to small and medium enterprises is already under the consideration of Parliament,” the finance minister said in his statement on the issue.

Analysts, however, see the move as a bid to skirt promises to Parliament on ratcheting up loans to the small-scale sector by broadening the ambit of lending to medium enterprises ' which banks consider more viable.

Finance ministry officials admitted as much. “This is a smart move. It places an emphasis on industrial resurgence, where SMEs have a critical role to play,” chief economic adviser to the finance ministry, Ashok Lahiri, said.

A Reserve Bank internal group had recommended that the current SSI/tiny industries definition should hold for now, but units with investments of over Rs 10 crore in plant and machinery could be treated as medium enterprises. However, it said only loans given to small enterprises would qualify for priority-sector lending.

Chidambaram also announced a one-time settlement of bad loans taken by small firms. Nearly 17 per cent of the Rs 67,634 crore lent by state-run banks to this sector are termed “bad”.

The minister said the Reserve Bank has been asked to formulate guidelines for the settlement in a way that makes the process “more liberal.”

Close to 3.5 million small-scale units, with investments of up to Rs 1 crore, are humming across the country. Though they argue that they are as bad or good a borrower as their large industrial peers, banks tend to shun them because loan recovery costs are far higher.

“Small scale industries produce 8000 products, contribute 40 per cent to the country’s industrial output and offer the largest employment after agriculture. The sector, therefore, presents an opportunity to harness local competitive advantages to achieve a global dominance,” the finance minister said.

The feeble finances of these units had prompted the formation of two committees to find ways to put them on firmer ground but not much headway was made in this revival effort. A draft law to safeguard their interests remained a non-starter, as did the long-attempted move to guarantee them a slice of government orders.

Politically, however, the sector remains critical for all parties since it employs nearly 20 million workers. The BJP-led Opposition even has SSI associations affiliated to it.

Chidambaram said state-run banks have been advised to fix their own targets to small and medium units so that loans to them grow at the rate of at least 20 per cent year- on-year.

The larger objective is to double the credit volume to Rs 1,35,000 crore by 2009-10 over 2004-05. He said banks would set up separate credit rating agencies to offer SME ratings, which would determine through a “transparent process” how much they pay as interest.

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