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Financing the Micro and Small Enterprises in India
A close look at the data on flow of bank credit to the micro and small enterprise sector in India since the 1970s reveals that the strategic intent of reorienting the industrial policy in the mid-2000s by carving out a new category called the micro, small and medium enterprises has not served any useful purpose in terms of making institutional credit available to the mses. It is also observed that the pro-market financial inclusion rhetoric of the second half of the current decade has not helped the msmes, especially those engaged in manufacturing activities, to enhance access to bank credit. The much-publicised Micro Units Development and Refinance Agency scheme, at the same time, appears as a mere window dressing as it has not infused any new funds into the system.
The authors thank K Ramesha, Director, Indian Institute of Bank Management, Guwahati for his extensive and incisive comments on an earlier version of this paper.
The mandate to provide financial support to the micro and small enterprises (MSEs) has been wedded to the social banking priorities in India since the 1960s. The National Credit Council in the late 1960s had identified small-scale industries (SSIs) as a priority sector for lending, along with agriculture. As the country moved into the liberalisation phase in the early 1990s, these priorities have been reset and redefined to match the objectives of developing a primarily profit-oriented, efficient and competitive banking sector. The rationale of continuing with the priority sector approach itself was questioned by a section of the banking and financial sector experts, both in India and beyond (Jain et al 2015; IMF and World Bank 2018). The onset of the financial-inclusion drive by around the mid-2000s, however, helped bring some of the critical questions concerning the nature and extent of financial exclusion of the MSEs back into focus. But, the proposed solutions to such exclusion have come to be crafted dominantly within the logic of economic liberalisation and reforms. The successive policy recommendations clearly suggested a new strategic intent on the part of the state and the central bank towards recalibrating the general financial architecture of the country, and creating new instruments and arrangements for deepening the financial markets (Nair 2016). These changes have been accompanied by a new way of delineating the bottom layer of enterprises by clubbing the hitherto ambivalent class of medium-sized enterprises along with the MSEs in the mid-2000s.
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 has, for the first time, defined “medium” enterprises as those with investments, in plant and machinery between ₹ 50 million and ₹ 100 million, while also raising the upper investment bound of small manufacturing enterprises to ₹ 50 million.1 The act has also introduced the term “enterprise” in place of “industrial undertaking” in a bid to make the definition inclusive of both manufacturing and services. As per the act, an “enterprise” refers to an industrial undertaking or a business concern or any other establishment engaged in the manufacturing or production of goods, and/or provision or rendering of services to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951. These definitional changes have rendered some of the earlier industrial categories like ancillary and export-oriented units redundant (Sajeevan 2012). While, currently, all bank loans to the MSMEs qualify under the priority sector without any credit cap.2
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