Academic journal article Indian Journal of Industrial Relations

Co-Creation: An Exploratory Study of MSMEs & Large Banks in India

Academic journal article Indian Journal of Industrial Relations

Co-Creation: An Exploratory Study of MSMEs & Large Banks in India

Article excerpt


As a result of various factors including information non-availability, non-implementation of professional working systems, and past experience of NPAs (Non Performing Assets), banks tend to detest lending finance to Small and Medium Enterprises in India (MSMEs) (RBI, 2005). On account of growth potential, employment generation capacity, export generation, and their role as the seedbed to new entrepreneurship MSMEs are an important segment of industrial and services sectors in India. (RBI, 2010)

Indian SMEs have come a long way since libralization in 1991. According to Rajan Kumar, Former CMD, Indian bank and VC, CVC 2010, "Experience has shown that the SME sector is becoming more efficient in terms of production vis-a-vis persons employed. According to the recent report by the Ministry of Micro, Small and Medium Enterprises (MSMS), the production during 2008-2009 went up by 11.4% whilst the number of persons employed rose by 5.2%. In the same fiscal year, 1.237 million new enterprises were added to this sector. This speaks of better utilisation of capacity and effective practices being followed by this sector."

Banks are the major funds provider to the SMEs. A RBI circular in FY 2005-06 made it mandatory for banks to lend to SMEs sector (priority sector lending). Due to the problems with regard to profits of SMEs and Non Performing Assets and risks in lending, banks operating in India (both Indian and multinational) need to provide unique solutions to SMEs for mutually sustainable growth.

Micro, Small & Medium Enterprises (MSME)

Micro, Small and Medium enterprises sector (MSME) (in this paper we will be using MSME and SMEs as interchangeable as in India SMEs are known as MSME legally) (Table 1) accounts for about 45% of the manufacturing output and 40% of the total exports of India as per value. Besides manufacturing more than 6000 products (Table 2) ranging from traditional to high tech items this sector also employs approximately 60 million persons in 26 million units (Table 3). The uniqueness of this sector is that it has registered a higher growth rate than the rest of the industrial sector (MSME 2010).

MSME sector contributes to approximately 8% of the India's GDP and 45% of Indian industrial production (Table 4)

Problem Faced by MSMEs

The major problem Indian MSME faces is availability of an adequate amount of finances (Thampy, 2010).

In India, banks are the providers of funds to the Industry. Especially for SME's, banks are saviors as SMEs do not have access to capital markets (Thampy, 2010; Todd & Javalgi, 2007). From the year 2005-06 and after the RBI circular, Government of India and the banks have started to pay considerable attention to the SMEs sector as it comes under the priority sector lending. Indian banks are required to give a minimum 40% of the adjusted net bank credit to the priority sector and foreign banks have a minimum 32% exposure to the priority sector (RBI, 2009). The biggest problem the bank faces while extending credit to SMEs is the credit risk of the SMEs. Borrowers have more information on projects than the banks (Myers & Majluf, 1984). There is the absence of a mechanism to bridge the information asymmetry between the borrowers and the lenders (Todd & Javalgi, 2007)

A bank considers two aspects in their credit decisions: a) the interest rate on the loan and b) the credit risk of the loan. A person will agree to pay higher interest on loans to projects, which has more risks. Greater risk projects have high risk of interest default (Stiglitz & Weiss, 1981). It is also argued that the issue of bank competition and credit availability may matter to SMEs as they are more vulnerable to information problems, and SMEs are more bank dependent than the large enterprises (Carbo, Rodrigues 8 Udell, 2008). It was also found that once the Government gives the priority lending status to SMEs, they have considerably beneficial impact on increase in sales due to availability of bank credit (Banerjee, Cole & Duflo, 2003). …

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