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India-Demand slump, fund shortage derail SMEs’ growth plans

Around mid-2008, a small Bangalore-based company contracted through MMTC imported lead ingots at $2,015 per metric tonne. By the time the consignment reached Indian shores, a couple of months later, the prices of lead had crashed to $925 per MT, along with a synchronised drop in prices of all other commodities. The company’s net loss in a single import consignment was Rs 1.09 crore.

The company faced many such similar experiences. The total damage of the crash has been collateral. MMTC threatened to invoke bank guarantees enough to bring the company to a grinding halt.

This isn’t a stray incident. Several SMEs have got caught in the global financial crisis since September 2008. The tragedy is that the segment that has been hurt the most is the one that has been the most progressive: SMEs that went for technological upgradation and expansion, joined global supply chains and made inroads in exports during the growth period.

Bulk of the SME sector was further hit by a double whammy in the domestic market: Slackening of demand and scarcity of capital. The index of industrial production (IIP) is sliding, having touched 0.4 in October 2008, its lowest ebb in the last 13 years. Exports have also registered a negative growth for two recent consecutive months.

There are four critical challenges that affect SMEs here: Working capital crunch and difficulty in accessing needed funds in view of recent reversals, antithetical regulations of NPAs and restructuring norms in banking which have become irrelevant in crisis situation — including complete lack of insolvency and bankruptcy codes for those SMEs which have already been damaged beyond repair, continued slide in demand and the rising protectionism tendencies led by large raw material producers through tariff and non-tariff barriers exacerbating competitive pressures.

The policy response needs to be seen in the context of these challenges. In this regard, RBI has indeed taken measures to ease liquidity and direct flow of funds. It has also issued guidelines for banks to be ‘sensitive’ to SMEs’ needs and take decisions on a case-to-case basis. The moot question is whether these steps have changed situation at ground.

(Anil Bhardwaj-Secretary General,FISME)

*source- The Economic Times