Credit to MSMEs – An Unending Saga
Reserve Bank of India (RBI) governor Shaktikanta Das, while speaking on monetary policy, said recently: “The key to monetary policy calibration lies in understanding the drivers of inflation: global supply chain disruptions, Ukraine-Russia War, external value of rupee, social schemes in the name of equity providing less than the compatible goods and services, ballooning current account deficit etc. Centre’s surreptitious freebies, states’ open freebies pushed up the rural demand far ahead of supply leading to price rise.”
The effect of inflation on this already disrupted supply chains is accentuated by the rate hikes to contain inflation. Credit becomes instantaneously costlier as the banks and financial institutions lose no time in passing on the rate hike to the borrowers, with disproportionate time for the depositors. Studying the flow of credit is constrained by authentic data. RBI and state level bankers’ committees (SLBCs) indicate only the stock represented by the outstanding credit available on the RBI annual reports, monthly bulletins, economic and political weekly and CMIE data. Hence, our study has this limitation for interpreting the data.
It reminds me of what Keynes said: “It would be foolish, in forming our expectations, to attach great weight to matters which are uncertain.” In his A Treatise on Money, he argued that “certain classes of investment are governed by the average expectation of those who deal on the Stock Exchange as revealed in the price of shares, rather than genuine expectations of the professional entrepreneur.” 
He clearly mentioned that this does not apply to classes of enterprise which are not readily marketable or to which no negotiable instrument closely corresponds. The categories falling in this category are fairly extensive – the micro and small manufacturing enterprises in the present connotation. (GTE, Ch.12, p.151) 
Rate fluctuations impacting on marginal efficiency of capital indicate that the new investments will not be in great disproportion to change in the yield of capital, while the marginal propensity to consume would not be seriously impacted, going by the static rate of employment and rising growth of gross domestic product (GDP). 
I looked at the changes in gross bank credit to industry versus the credit to micro and small manufacturing enterprises. 
Analysis of changes is constrained by non-availability of the flow of credit, in terms of disbursements month by month or quarter by quarter and the number of enterprises. The data gives an idea of stock of credit or outstanding credit that includes interest, inspection charges, insurance payments, guarantee commissions, and SMS messages and sometimes unspecified debits to the clients’ accounts. 
Credit Outstanding
RBI bank rates were constant, ranging from 4.25% to 4.65% ever since the pandemic broke, and it goes to the credit of the RBI for maintaining financial stability by making sure that liquidity of the system is not affected by infusing more than adequate capital into the banks. 
The Union government announced Atma Nirbhar Bharat Abhiyan to push the companies on margin get incremental credit to stay in businesses. When we see the data relating to outstanding credit to the micro and small manufacturing enterprises (MSEs) in the chart, ‘not all the perfumes could sweeten the little hands.’ Credit outstanding for this sector has been reflective of risk aversion from the banks.
Thus, with these two primary variables remaining uniform, it was unanticipated to find that the credit outstanding at the MSE levels was fluctuating exceptionally. 
Source: RBI Monthly Reports
From the above table, it can be clearly inferred that quarters 2 in 2020 and 2021 were hit negatively. With the gross bank credit (GBC) flowing out in a linear path, the expected outcome for the MSE sector has to be in line with the GBC levels, since they front-end the supply chains of the medium and large industry. But with the negative outcomes glaring, it projects a different picture comprehensively. 
It would appear that the outstanding credit to MSEs has been flat blue line. If the banks had extended the Atma Nirbhar Bharat Yojana incentive of moratorium and incremental credit during the period June 2020-June 2022 even to those who deserved it (more than 60% as some studies revealed), the share of MSEs in GBC should have been impressive instead of wild fluctuation in the credit outstanding. 
Progressive increase in outstanding credit was impressive during the year 2020-21 while in the very subsequent year, the huge increase during the first quarter of 2021-22 fades to a negative 2.584%. The jump in the very subsequent quarters should be attributed to the banks’ reclassification of the MSEs according to the new definition announced in June 2020 and the new registered units under Udyam Aadhar portal. 
While the outstanding credit in the first quarter of 2021-22 increased by 5.307%, during the first quarter of 2022-23 it was just 0.596%. Such a large decline only indicates the continued risk aversion of the banks. The chart below showing month on month variation clearly indicates the very wild fluctuations in the stock of credit to the MSEs compared to the medium enterprise sector. 
While the medium enterprise sector credit stock peaked during November2021-January 2022, it nosedived in March 2022. Banks must have put pressure on the enterprises to reduce the outstanding credit for managing their balance sheet provisions. 
It is, therefore, desirable that these MSEs, touted as seedbeds of employment generation and engines of growth, should be seen through a different lens with a view to mainstreaming into the economy and not outbound players. Another evidence, stark and naked, is their presence in the start-up category. 
Manufacturing MSEs are less than ten percent of the total number of start-ups. For the past two decades, their ability to pare with the service sector enterprises in payment of wages and salaries to their employees, has made them depress, and highly uncompetitive. 
Human resource management of the MSEs did not receive adequate attention of the governments as much as digitisation. 
Perverse incentives and untimely delivery of incentives at the other end also added fuel to the fire. A growing economy, that promises to reach the third in the global economies, has to devote greater attention to the ecosystem of the MSEs that form the front-end of the supply chains of the large and medium industry. 
Credit is an important element of the process but not a sufficient condition for growth. MSE manufacturing has competitive advantage in the agro-industry sector even globally when the food processing chain of clusters and logistics are supported with appropriate packaging, branding, and export incentives.
Focus should be on the way the MSEs can be enabled to build equity over time and the way they can be helped to scale up. RBI and GoI should evolve their management information system in a way that they periodically get data on the number of enterprises financed and the credit disbursed and not just the credit outstanding that includes interest, SMS charges, inspection charges and compound interest. 
Incentivising them for digitisation and culturing them to regulatory compliance are worthy investments in the MSEs to ensure their sustainability and resilience.
(The author is founder Director of Telangana Industrial Health Clinic Ltd, and an economist with three decades of experience as banker. He is thankful to Ramya Bhavani for the statistical support.) 
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