By: Ravi Teja Sharma


Happy News Here: The recession is officially over. But doIndian SMEs have reason to cheer?


During the past one year, it was the small and mediumenterprises sector that was affected the most due to the economic downturn.Orders from larger companies dried up and credit availability declined. SMEexporters had it the hardest amidst rising defaults by international buyers.But the last quarter has shown some hope to these companies.


According to a CII-MSME Outlook survey, the July-September2009 quarter could be the point where things start to improve for Indian MSMEs.According to the results of the study, 45% respondents reported an increase inturnover, 42% respondents registered an increase in production and 38%registered an increase in order booking in comparison to the first quarter of2009-10. The report attributes the positive shift in the July-September quarterto the trickle down effect of various government stimulus packages over thelast nine months. The worst of the crisis period is over and a turnaroundseems within sight for most of the industry, says Salil Singhal, chairman ofCIIs National MSME Council.


Credit flow during the first nine months of 2009 for SMEswas up over the same period last year. Micro and small enterprises have seen acredit flow of Rs.40, 146 crore this year compared to Rs.23, 865 crore in 2008.And while total credit flow in this period was down from Rs.4, 84,805 crore in2008 to Rs.3, 08,718 crore in 2009, the share of SMEs in the overall creditflow increased from 4.9% to 28%.


Sanjay Sahni, managing director of Ritu Wears, is a happierman today as the recession recedes. In the last six months, his company managedto double its total store area, from 1 lakh sq ft to 2 lakh sq ft. He agreesthat credit availability has improved considerably. Upto March there was adifficulty but since then the attitude of the banks has changed. Capital aswell as working capital is now available, says Sahni. The growth in businesshas meant new hiring. The company is in the process of hiring 35 senior and midmanagement people over the next few months as it plans to open seven new storesin the next 12 months.


The Government of India announced a policy package in 2005and total bank exposure to MSMEs was Rs.67, 600 crore. All banks wereinstructed to ensure 20% increase in credit to MSMEs every year so that creditto them doubles in five years by 2010. In March 2009, the exposure stood at Rs.2, 57,000 crore, which is almost four times. MSMEs, having weathered thedifficult economic times, will emerge stronger if due financial andtechnological support is extended to them, says Dinesh Rai, secretary,ministry of MSME. The challenge now would be to establish globalcompetitiveness, for which they will need to focus on new technologies, R&Dand market expansion.


The first stimulus package reduced CENVAT by 4%, cutinterest rate by 0.5% for small and 1% for micro enterprises by PSU banks,introduced interest subvention of 2% for exports, reduced the lock-in periodunder Credit Guarantee scheme from 24 to 18 months and announced an additional planexpenditure of Rs.20,000 crore. The second package included duty drawbackbenefits for certain products like bicycles, agricultural hand tools, andspecified category of yarns with retrospective effect from September 1, 2008, whichwere expected to have a beneficial impact on MSMEs.


There is no dearth of credit for SMEs


The impact seems to have been positive with orders flowingin once again from overseas customers. Considering that SMEs contribute about40% of Indias exports, this is a welcome sign.


Exportshave begun to pick up slightly. The auto and auto ancillary segments are doingquite well and demand for credit has picked up from them. Even textiles sectorhas improved slightly and there is an increase in working capital requirementfrom these companies. Of the overall credit flow in the last three months,majority has gone to agriculture and to some extent to the SME segment, saysTR Bajalia, executive director and head-SME at IDBI Bank. GS Madan, managingdirector, Madan Trading Company, couldnt agree more. Orders have started tocome back in the last 1-2 months, though profit margins have dropped. We aresurviving on our own as the government has not done much. Enough orders cancome our way but pricing is a challenge as yarn prices have gone up 30%, hesays. He adds that business from the US has improved slightly but orders fromEurope and UK are back. The US should improve further in another 4-5 months.

The improvement is also apparent in the way hiring has picked up in the SME segment. Small and medium business are coming back with a renewed vigour to hire again, especially in the auto components, telecom equipment and pharma sectors, says Amit Tandon, director, Empryean Partners, an HR services firm which works with a number of SME clients. The hiring demand, says Tandon, has picked up considerably in the last quarter. The demand for new hires from SMEs in the July-September quarter was up 40-50% over the last quarter and about 60-70% higher than the January-March quarter. The interesting part today is that SMEs are able to lower their wage bills today because salary expectations today are around 10-15% lower than earlier and in some cases of people who lost their jobs during the recession are available at 30-35% lower salaries. The auto components sector has seen renewed hiring as demand in the auto segment shot up in the last few months.


These fears too have been allayed over the last few months. Deputy Governor of the Reserve Bank of India KC Chakrabarty recently said that there is no dearth of credit in the system for MSMEs and that no bank shall refuse credit to viable and transparent enterprises.


Originally published in "The Economic Times" dated November 30, 2009