It is disconcerting that the new year, according to the Hindu calendar, has begun on a crisis note for the small and medium industries. The SME sector is the backbone of the economy, accounting for 30 per cent of the GDP, employing around 11 crore people through a little over 6 crore units.
Their main source of funds are the non-banking finance companies (NBFCs) that provided for 12-15 per cent of the total credit generated in the last two years.
Most NBFCs are facing a drought-like situation as far as funding is concerned. In fact the sparing witnessed recently between the government and the Reserve Bank of India was over the need for banks to release more funds to NBFCs.
There are about 11,000 NBFCs operating in the country and the play a major role in lending to millions at the bottom of the pyramid, those who rarely get loans as they cannot afford the collateral.
Admittedly, in the case of the troubled NBFCs it is the fact that their chickens are coming home to roost. They have been reckless in their efforts to grab market share and had been borrowing for short-term and lending long- term in sectors like infrastructure, something that even a novice in the money game would know is a disaster waiting to happen.
Granted that they have been reckless, but the solution is not to throw the baby and the bathtub out of the window. There is need for the government to sit with the RBI and find a way out.
At stake are several issues like the employment and livelihood of millions of people who keep the wheels of the economy turning and also the Prime Minister’s vision of Housing for All....