The High Level Credit Committee Report

1.01One of the most significant features of the planned economic development in India has been the development of Village, Tiny and Small Scale Enterprises. The country accorded a high priority to this sector on account of its employment potential, comparatively low requirement of capital, short gestation period, use of traditional skills, useful links with the medium and large sectors, wide geographical dispersal, promotion of balanced regional development, low per unit cost of employment, utilization of local resources, suitability of production of goods for mass consumption, mobilization of small savings, provision of part time working arrangements and production of exportable products etc.

1.02 At the end of March 1997, there were 28.6 lakh Small Scale Industrial (SSI) units in the country; during 1996-97 the value of production by these units aggregated Rs.4,12,636 crore and they provided employment to 160 lakh persons.

Table 1.1 gives the overall performance of the SSI sector in terms of output, employment and export.

(P) Provisional

(Source : Economic Survey, 1997-98)

It is also estimated that during 1996-97 Traditional Industries sector produced goods worth Rs.53,716 crore, provided employment to 345 lakh persons and exported goods worth Rs.27,343 crore. Powerlooms produced cloth worth Rs.23,926 crore, provided employment to 70 lakh persons and exported goods worth Rs.4,036 crore. The sub-sectoral contribution to employment and production is given in Table 1.2.

Anticipated @ Negligible

(Source: SIDBI Annual Report 1997)

Draft Ninth Plan projections for the village and small industries sector have set a target for outstanding working capital and investment credit requirements in the terminal year of the plan at Rs.1,83,794 crore and Rs.60,833 crore, respectively.

1.03 RBI uses an expanded definition of SSI which includes :

1. Small scale industrial undertakings which are engaged in the manufacture,
processing or preservation of goods in which the investment in plant and machinery does not exceed Rs.3.00 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery.
2. Tiny enterprises whose investment in plant and machinery does not exceed Rs.25.00 lakh;
3. Powerlooms;
4. Traditional industries which require high workmanship and technique as also village and household industries producing common goods of consumption, predominantly by using simple tools;
5. The decentralized and informal sectors like handlooms, handicrafts, coir etc. and
6. The industry related Service/Business enterprises which are notified as such.
7. It is proposed to use the above definition of SSI in this report.

1.04 On a normative basis, 40% of the net bank credit of the Domestic Commercial Banks is earmarked for the priority sector, of which SSI is an important component. The advances to SSI of Public Sector Banks formed 17.2% of net bank credit at the end of December 1997. For Foreign Banks, the priority sector obligation is 32% of net bank credit.

Of the total SSI advances, 40% is required to be made available to units with investment in plant and machinery upto Rs.5.00 lakh, 20% ot units with investment in plant and machinery between Rs.5.00 lakh and Rs.25.00 lakh and the remaining 40% to other SSI units.

1.05 Elaborate programmes, policies and procedures, have been laid down by the Government both at the Centre and in the States to provide protection to this sector and to create a congenial environment where it could grow and prosper. This policy was initiated immediately after independence of the country in 1947. A number of changes took place over the period 1947 to 1990 which include the following :

1. The sector has been protected by (a) reserving production of a large number of products exclusively by SSIs, (b) giving fiscal concessions by way of lower excise duties for SSI during the period of their infancy, and (c) extension of promotion services by the Government.
2. Government procurement of goods and services from this sector on a preferential basis was also used as a tool to encourage the promotion of this sector and to reduce the risk of market entry.
3. Directed credit was provided by the banks, as this sector was treated as an important segment of the priority sector.

4. Besides, the tiny sector and village industries were given the benefit of availability of credit from banks at concessional rates.

1.06 During 1991, the Government came out with significant changes in the National Policy pertaining to industrial and economic growth to usher in a new era of liberalisation, debureaucreatisation and market oriented deregulation.

Small scale sector was also exposed to the challenges which the opening up of the economy unleashed. A number of studies have, however, concluded that the small scale sector has been able to face the challenges in a much more confident manner than the other segments of the industrial sector. This is also borne out by the fact that the rate of growth of small scale industries in the post liberalization period has generally been better than the rate of general industrial growth in the country. (Tables 1.3 and 1.3.1).

(P) Provisional

(Source: Economic Survey, 1997-98)

1.07 Timely and adequate availability of credit is crucial for the setting up and expansion of small scale units. The banking system generally meets the working capital requirements of SSI sector and State Financial Corporations (SFCs) provide them therm loans. Reserve Bank of India (RBI) and Government of India have taken several policy measures to step up the flow of credit to this sector.

1.08 A separate policy statement for small, village and tiny enterprises was also issued in 1991 which outlined developmental, deregulatory and de-bureaucratic measures and underscored the need to shift from subsidiesed/cheap credit (except for specific targeted tiny/village industries) to a system which would ensure adequate flow of credit on timely and normative basis to this sector.

1.09 To ensure adequate and timely flow of institutional credit to Small Scale Industries (SSI), a Committee headed by Shri P.R. Nayak, the then deputy Governor, RBI was appointed in 1991. On the basis of the recommendations of this Committee, guidelines were issued by RBI banks, inter-alia, advising them to (i) give preference to village industries and the smaller tiny units while meeting the credit needs of small scale sector, (ii) grant working capital limits to SSI units whose credit limits in individual cases were upto Rs.50 lakh (since enhanced to Rs.4 crore) computed on the basis of minimum of 20% of their estimated annual turnover and (iii) extend Single Window Scheme (SWS) of Small Industries Development Bank of India (SIDBI) to all districts of the country. The application forms as well as procedures for borrowing by SSI units were also standardised and simplified.

1.10 Sickness in industry is a worldwide phenomenon. Small scale units in our country in various industries also fall sick on account of a variety of reasons. As per RBI data, there were 2,35,032 sick small industrial units in the country with outstanding bank credit of Rs.3,609 crore as on 31^st March 1997. Out of this, 16,220 (6.9%) units were identified as potentially viable, of which 10,539 units (65.0%) were put under nursing programmes.

Table 1.4 gives the position of sick SSI units for the two years ending March 1997.

Table 1.4

(Rs. in lakh)

(Source: Reserve Bank of India).

1.11 Government of India (in the budget for 1995-96) had announced a Seven-Point Action Plan which, inter-alia, envisaged setting up of specialized SSI branches in identified districts having high density of small scale industries, adequate delegation of powers at the branch and regional levels, sanctioning of, as far as possible, composite loans to SSI entrepreneurs and reorientation of approach of bank branch managers regarding working of SSI sector.

Form 1991 onwards, an overall scheme of structural reforms was initiated. Financial Sector Reforms were a part of this process and included, among others, the initiation of a number of measures in the field of credit to SSI like:

1. Deregulation of lending rates of RRBs and co-operatives.
2. Financial and managerial restructuring, including recapitalisation, of select Regional Rural Banks (RRBs).
3. Application of the DAP/MOU discipline for co-operative banks and RRBs.
4. Deregulation of lending rates of commercial banks for all loans above Rs.2 lakh.
5. Introduction of prudential accounting norms and provisioning requirements for commercial banks, RRBs and co-operative banks.
6. Relaxations in the Service Area Approach.
7. Widening the scope of indirect lending to the priority sector through placement of deposits with investments in the debt instruments of SIDBI, SIDCs SFCs and NSIC.

1.13 These measures have been substantially implemented by the banks and there has been significant increase in terms of outstanding credit of Public sector Banks to SSI from Rs.16,783 crore as at the end of March 1991 to Rs.33,383 crore as at the end of December 1997, accounting for 17.2% of the net bank credit.

However, there has been a decline in outstanding credit for SSI sector as a percentage of annual production from 8.1% in 1991-92 to 7.7% in 1996-97 (Report by the Development Commissioner, SSI). The total advances to SSI from Public Sector Banks and its percentage to net bank credit is given in Table 1.5 below:

(Rs. crore)

(Source: Reserve Bank of India).

Certain other important developments which have contributed to flow of credit to SSI are; reduction in CRR/SLR requirements; recent increase in investment limits (for SSI) in plant and machinery from Rs.60 lakh to Rs.3 crore; opting out by a number of banks from the guarantee cover of DICGC; the gradual blurring of the distinction between banks and term lending institutions (each progressively taking up the functions of the other).

1.14 Several studies have been conducted by RBI to examine whether the banks have adhered to the recommendations made by the Nayak Committee and implemented the Seven-Point Action Plan. These studies have revealed that despite the instructions/guidelines issued by RBI from time to time, there were deficiencies in certain respects in compliance, at the operational level. Resultantly, SSIs still continue to face various problems in getting adequate and timely credit.

1.15 The Governor, RBI appointed a One-Man Committee under the Chairmanship of Shri S. L. Kapur, Member, Board for Industrial and Financial Reconstruction (BIFR), Former Secretary (SSI and ARI), Government of India, to look into various problems, germane to credit flow to SSI sector and suggest appropriate measures for their redressal.

1.16 The Terms of reference of the Committee are as under:-

The Committee relied upon the response to the questionnaires issued to Commercial Banks, State Financial Corporations, Industry Associations/Chambers of Commerce and Industry and the State Governments, as also the information provided by various institutions connected with SSIs. It met the Governor and senior officers of RBI, Chairmen & Managing Directors/Managing Directors of Commercial Banks/State Financial Corporations, Managing Director of Small Industries Development Bank of India, Chairman of National Bank of Agriculture and Rural Development, representatives of Industry Associations, Chambers of Commerce and Industry, Factoring and Venture Capital Companies, Non-Government Organisations, Women entrepreneurs etc. Besides, it visited different States and interacted with Chief Secretaries/Secretaries to the State Governments. In order to have a direct feed back and a closer view about financing functions of bank branches, the Committee visited a few specialized SSI branches in different regions of the country as also a branch each of a Regional Rural Bank and Urban Co-operative Bank. The selection of the States/bank branches was on a representative basis. A list of the meetings held and the branches visited is given in Annexure I.

The views expressed during the meeting/visits which were relevant to the systems and procedures and also to policy and operational matters have been given due consideration while drafting the Report.

The report consists of six Chapters:

• The First Chapter deals with the Committee’s terms of reference and related matters.
• The existing institutional framework for lending to SSI has been dealt with in the Second Chapter.
• Recommendations regarding the Strengthening of Credit Delivery Systems for the subject matter of Chapter III.
• The Fourth Chapter presents recommendations regarding policy matters.
• The Fifth Chapter deals with the recommendations regarding the strengthening of the internal grievances redressal machinery in the banks and miscellaneous issues connected with the flow of credit to SSI.
• A summary of the major recommendations is included in Chapter VI.

2.01 Government has promoted a number of agencies for financing the SSI sector, the most important being the Public Sector Banks and the Small Industries Development Bank of India. National Bank for Agriculture and Rural Development, Regional Rural Banks, Urban Cooperative Banks and Foreign Banks also provide finance to this sector on a priority basis. The State Financial Corporation (which have been set up under a separate statute) are meeting mainly the term loan requirements of small scale sector. Khadi and Village Industries Commission (KVIC) and Khadi and Village Industries Boards (KVIBs) assist in financing Khadi and Village Industries Sector. Besides, National Small Industries Corporation andsome specialized women’s corporations and minority bodies also provide assistance to SSIs.

2.02.01 The Public Sector Banks other than the Regional Rural Banks, have over 44,000 branches covering practically every nook and corner of the country (Table 2.1). They have, therefore, the widest possible reach and have always been depended upon by the Government for providing need based credit facilities to this sector. However, they have mainly concentrated on providing working capital.

# As on June 30, 1997

@ Population group-wide classification of branches as per 1991

Census.. Negligible.

Notes:

1. Figures in brackets indicate percentage to total in each group.
2. Bank branches exclude Administrative Offices

Source: (RBI Report on Trend and Progress of Banking in India –1996-97)

2.02.02 With the introduction of prudential norms, some of the banks have been loaded with huge non performing assets. These have been described as weak banks and the scope, for their innovating and introducing new products, has been severely limited because of their financial position. Government of India through Reserve Bank of India, have taken a number of measures to recapitalise these weak banks so that they could continue their operations in a viable manner.

2.02.03 One of the more important recommendations made by the Nayak /committee and endorsed by Reserve Bank of India and Government of India was opening of specialized SSI branches in 85 districts of the country having the highest concentration of SSIs. Later, the banks were advised to open such specialized branches in another 119 districts having lesser concentration of SSI units. According to the data available, 353 specialised branches had been opened by the Public Sector Banks till March 31, 1997. During the financial year 1997-98, only 17 such branches have been opened which shows that the banks have suddenly decided to decelerate this process. Out of these 353 branches, 138 were actually not new branches, but were existing branches converted into specialised SSI branches. The bank-wise details are given in Annexure II.

2.02.04 The advances of Public Sector Banks to SSI as on the last Friday of December 1997 amounted to Rs.33,382.55 crore in 31.77 lakh accounts. The bank-wise break-up is furnished in Table 2.2.

(Accounts in lakh) (Amount in crore)

N.A. = Not Available (Provisional Data).

(Source: Reserve Bank of India)

2.02.05 The credit disbursements to SSI of scheduled commercial banks as on the last Friday of June 1995 aggregated Rs.7,775.96 crore. State-wise break-up is given in Table 2.3.

(Amount in crore)

@ Negligible N.A.= Not Available

(Source: Reserve Bank of India)

2.02.06 The lending by private sector banks and foreign banks to SSI as on 31 March 1997 was Rs.4,717.00 crore and Rs.1,826.00 crore respectively.

2.03.01 Regional Rural Banks have the second largest spread with 196 banks having more than 14,000 branches. Unfortunately their past performance has not been very good. They could advance to the cottage and village industries Rs.607.28 crore only which formed 7.7 per cent of their total advances as at the end of September 1996. We understand that these modest advances have also generally been given to target groups under government sponsored special programmes such as IRDP.

2.03.02 With Reserve Bank of India having permitted RRBs to lend to non-target groups also and placing them at par with the commercial banks as far as their obligations for lending to the priority sector are concerned, these banks are today poised to provide competitive banking services to a very large number of SSI units in rural areas. Further, their financial and managerial restructuring including recapitalisation of selected Regional Rural Banks, has shown positive results and more than 40 RRBs have now started showing profits. We expect them to become an integral and an important part of the national. Strategy to finance SSI.

2.04 Proposals

2.04.01 The Committee visited a few such banks and had an occasion to interact with some of their Chairmen. Their staff is willing to grab the opportunity offered by small scale enterprises in the rural sector to increase the business and improve performance. Therefore, we have to plan for crash training programmes for the staff members with an emphasis on proper motivation, development of project appraisal skills, monitoring of credit and modern banking procedures etc. The sponsoring banks and NABARD have also to ensure that adequate funds and human resources are made available for this purpose. They could also be permitted to open specialized branches on the pattern of sponsoring banks where focus could be on services to SSI. Since they have some branches in semi-urban areas and small towns and to augment their resources, they could also be provided refinance support by SIDBI, for their loans to the SSI sector

2.04.02 RRBs are facing certain problems relating to documentation, stamp duty, mortgage of property etc. In rural areas, mortgages are completed on the basis of land records and through the process of registered mortgage. We were informed in a village in Gwalior (M.P.) that the State Government is not permitting agricultural land to be mortgaged for raising loans for industrial purposes. And if permitted full stamp duty/registration charges are levied on such mortgages as distinguished from agricultural loans. Also equitable mortgages are not permitted in respect of agricultural land for raising industrial or business loans. Hence the issue needs to be deliberated with the various State Governments for evolving a well coordinated national strategy for providing credit to SSIs in rural areas and removing the legal and procedural difficulties. Equitable mortgages should be permitted and if registered mortgages have to be done, these should be permitted without any stamp duty or registration fee as in the case of agricultural loans. The agricultural land should be permitted to be mortgaged for raising business or industrial loans. Recovery of such loans could be made through attachment and sale of property as in the case of agricultural loans. One of the States which we visited had imposed a special tax on equitable mortgages also. Such retrograde taxation measures should be discouraged.

2.05.01 SIDBI set up under an Act of Parliament is the wholly owned subsidiary of IDBI. SIDBI commenced its operations on April 2, 1990 and assists SSI sector through its (a) Refinance Schemes (b) Direct Assistance and (c) Promotion and Development programmes.

2.05.02 Over the last eight years of existence (1990-98), its sanctions grew from Rs.2,410 crore to Rs.7,480 crore and disbursements from Rs.1,839 crore to Rs.5,239 crore, registering a compounded annual growth rate of 17.6 per cent and 16.1 per cent, respectively. The aggregate sanctions and disbursements during the 8 year period amounted to Rs.36,260 crore and Rs.26,700 crore respectively. It may be mentioned that out of the cumulative assistance, 80 per cent related to term financing and 20 per cent to working capital assistance, by way of bills facility/resource support to factoring organisations.

In terms of Nayak Committee Report, the estimated term financing requirement from SIDBI during the 8^th Plan period, was placed at Rs.9,950 crore against which SIDBI had advanced more than Rs.12,000 crore during the plan period, thereby exceeding the given target of term credit to SSI. Of this, nearly 65 per cent of the assistance has been extended by way of the assistance has been extended by way of refinance and resource support to the primary lending institutions engaged in development of tiny and small scale sectors. Maintaining the previous growth, SIDBI is poised to meet the long term credit requirements of the SSI sector with an estimated disbursements of about Rs.35,000 crore over the next five years.

2.05.03 When SIDBI took over the outstanding portfolio of SSI from IDBI aggregating to Rs.4,200 crore, the portfolio related mainly on refinancing and bills rediscounting operations. The portfolio has swelled over a period of time to Rs.12,800 crore by the end of March 1998, giving compounded annual growth rate of 16 per cent in asset growth which can be considered fairly reasonable performance in the institutional mechanism.

2.05.04 Since inception, to meet the requirement and mitigate the difficulties of the sector, SIDBI has been designing new products and instruments which include the following:

2.05.05 SIDBI has also been paying special focused attention for promotion and development of vulnerable sub-sectors of the economy, tiny sectors and rural poor by taking up specialized developmental initiatives including Rural Industrialisation Programmes (RIPs) and Micro Credit Scheme (MCS).

2.05.06 SIDBI’s thrust areas are :

• Technology Development and Modernisation of SSI
• Infrastructure Development for SSI
• Improved marketability of SSI products both in domestic and international markets.
• Venture Finance for developing innovative ventures in SSI
• Enhanced export capabilities of SSI

2.05.07 SIDBI, operates six funds mainly to nurture the smaller of the small SSI units.

2.06 SOURCES OF FUNDS