Friday, August 12, 2005

Bet on people's enterprise

I think the Finance Minister is right in pushing for a higher level of lending and lower interest to the Small and Medium Enterprises (SMEs). While many may disagree with the mechanism for implementing it, the principle idea behind it cannot be faulted. The chances are that a SMEs of today will become the billion dollar corporation of tomorrow.
The popular argument is, that the reasons banks are not lending to this sector and charging high interest rates for whatever little they lend, is because of the high incidents of Non Performing Assets (NPAs) amongst SME borrowers. The real reasons for the NPAs lies in high interest rates charged by the banks to the SMEs in the first place.
And the popular suggestion is, to lend credit to those SMEs that have linkages with larger units. Wrong again. A lot of large corporations in India exploit SMEs by delaying payments to them for as long as they can. In effect getting themselves financed by SMEs who borrow at high interest rates from banks. The SME is likely to succumb to cash flow shortage than lack of sales.
One has to treat lending to the SMEs and the small scale as seed capital(venture fund). The Finance minister is absolutely right in pushing for more credit to this segment even at risk of some of it becoming NPAs. The payback for India can be huge. Nearly 50% of the US GDP is contributed by SMEs. For India the ratio is 30%. Quite large considering all the problems they have to face up to in doing business here. Also an indication of how much growth potential there is in this segment. Even if the government has to write-off some NPAs that are created in the process of pushing for greater financial assistance to SMEs, it will be shortchange when compared to the colossal waste that government enterprises (the original choice as growth engines for for the economy) have inflicted on the nation. The Finance Minister is acting as a venture capitalist and as a long term investors, attempting to create some very high yield assets. This of course does not mean that one is proposing a soft stand towards willful defaulters.

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