Universal access to Credit guarantee schemes for MSMEs can be an effective instrument for human capital development in India
Recently Karnataka State Finance Corporation(KSFC) came out with a scheme to extend loans at 4% interest rate up to 5 cores for the manufacturing sector and up to Rs 2 crores for the services sector.
The scheme at the outset attracted eyeballs of many entrepreneurs. The steep reduction in the rate of interest for such a huge level of loan facility is a game changer for the MSME segment as it can alter the potential landscape for competition.
It is a welcome step. Any reduction in interest cost for MSMEs will go long way developing efficient and competitive manufacturing and services landscape in the country’s economy.
Whether the scheme will cover all eligible entrepreneurs, is a matter of interest.
Access is limited due to the need for collateral security:
The scheme (of KSFC) unlikely to support many entrepreneurs. Entrepreneurs who just started a venture in rented premises and if he does not have any collateral security in the form of fixed assets, such entrepreneurs are out of the ambit of this scheme.
Many entrepreneurs in the early have face challenges. That constitutes a significant chunk of the micro and small enterprises segment in our country. By depriving that segment of such a scheme, there will be an unequal competitive landscape created within the same industrial activity vis-a-vis those who can avail such cheaper loans.
In such circumstances, the first entrepreneur will remain at the disadvantageous position. He will have to remain to endure with a high cost of borrowing and lower realisation.
In that way, the noble objective of incentivising the entrepreneurship will make way for competitive distortions to creep in.
Predominant preference for collateral security ignores the key elements of the success of entrepreneurship:
Over-reliance on collateral security to extend the loans also mean ignoring the vital elements that lead to the success of the venture. The key elements are the viability of the project and competency of an entrepreneur. These are ignored or treated secondary to the decision making.
Current credit systems exclude or punish people:
Despite the good intentions of policymakers in bringing out various schemes, the credit delivery system in our country is not assuring the entrepreneurs of minimum support to sustain the business through the formal channel of financing.
Many entrepreneurs are invariably resorting to borrowing from short-term informal money market thereby either postponing the capital formation or never attempting to build the capital asset. Few are forced to remain on the edge throughout.
Creditors cannot be blamed either:
Creditors do have their own set of apprehensions. The recovery climate is very bad compared to many developing countries in the world despite India is having a well-developed banking system. Interference of political leadership in announcing waiver schemes also disturbing credit-debtor bilateral relationship.
Lower record of recovery is compelling them to seek the collateral comfort of fixed assets to secure their loans.
Take away the concerns on the collateral:
Taking away the limitation of collateral through the guarantee scheme will equalise the competitive landscape and access to facilities will be solely on the merits of the project. It also converges policy supports of state and central govts to make MSME segment grow by leaps and bounds. It may enhance the reliance on information collaterals than being blinkered by the availability of fixed assets as collaterals.
CGTMSE- A great framework to achieve financial inclusion, requires reforms:
Presently Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme is extending credit guarantee up to Rs 2 crores for the loans extended by the commercial banks for micro and small enterprises.
CGTMSE scheme can be positioned to include all kinds of institutions engaged in lending to MSMEs. This will reduce the risk of default to lenders that in turn will expand the access to credit for MSMEs.
The annual cost of CGTMSE is cover is very nominal. The low cost of participation in the CGTMSE scheme removes the high barriers of entry into the formal credit sources and sway the entrepreneurs from the high-cost informal lenders. And, because more lenders are participating, access to credit by individuals from all corners of the country is possible, thereby making CGTMSE a true and viable solution for ensuring universal access to credit.
Govt should take steps to expand the lenders who can access CGTMSE cover for their lending to MSME segment be it public sector banks, private banks, Small Finance Banks, State FCs, NBFCs, Coop Banks to increase the coverage.
Further, there are many concerns on the claim settlement by CGTMSE so much that it contains huge uncertainty. Such concerns need to be addressed on an urgent basis so as to instil confidence in the lenders. Also, there are issues like mandatory filing of the case in civil court before preferring claim with CGTMSE, this condition may be left to the discretion of the bank and may include preferring bankruptcy proceedings.
Treat Credit Guarantee as a human Capital development Investment:
There are 633 lakh MSMEs in India and more than 99% are micro enterprises. In Karnataka alone, there are 38.34 lakhs MSMEs.(Source 73rd NSS)
These MSMEs by and large provide employment opportunity to skilled, and semi-skilled people.
Assisting these units to overcome the challenge of raising financial resource will help the agenda for human capital development. On the one hand it expands entrepreneurial activities and on the other hand employment opportunities will be created for lower strata of the society.
Credit Guarantee Schemes like CGTMSE can play an important role in ensuring universal access to credit and can contribute to achieving financial inclusion of the excluded section of society.
Thus it plays for promoting entrepreneurship, job creation and ultimate instrument for the human capital development of the country. Hence it requires to be addressed as an investment in human capital development than merely extending transactional support to the debtor-creditor relationship. Such a shift is policy perspective will facilitate the larger flow of Govt’s budgetary support to credit guarantee schemes.
Universal access to credit is an important policy support urgently needed for MSME segment. This can be achieved by universalising credit guarantee schemes like CGTMSE to make it broad-based and encompassing all the types of lenders who cater to the credit requirement of MSMEs. By doing so, MSMEs will contribute significantly to human capital development goals.
(Anil Kumar Shetty, Founder, SME Advisors, Bangalore)