Caught In The Middle?

One reason for the concern, it has been said, is that large corporates which boast of foreign collaborations are hogging an unfairly large part of the credit offtake. It is doubtful if there are any empirical facts to justify the contention: the Reserve Bank of India takes its own time in tabulating industry-wise credit growth statistics. The finance and the industry ministries, which keep detailed tabs on collaborations and joint ventures, should be in a better position to know the financing pattern of such companies. What can be said with a fair degree of certainty is that companies with foreign collaborations occupy such a small part of the total arena of domestic industry that their demand for credit cannot be so overwhelming so as to crowd out the vital needs of the mid-cap and small companies.

Indeed, concerned sections have only to look at the most obvious case of Maruti to realise that foreign direct investment absorption takes place over a relatively long time frame. Maruti has given rise to a whole lot of ancillary industries and service organisations scattered over the country. Some of Marutis ancillaries have become stars in their own right. But none of this happened overnight. Can it be credibly argued that in this process Marutis significant credit requirements has slowed down the credit availability to other, smaller companies ?

The fact is that the government and the Reserve Bank have taken numerous steps in recent times to improve the credit flow to small and mid-cap companies. With the numerous cuts in the cash reserve ratio, the availability of surplus funds with banks has increased significantly. What is holding back credit expansion is perhaps the shortage of good assets to lend against. Bankers resistance to lend to small companies comes out of a perception of higher risk. But this cannot be countered by diktats. The plight of mid-cap companies has been further compounded because the equity market has been in a limbo over the last two years. Consequently, companies have not been able to even raise the equity component of their projects, which has precluded them from tapping bank finance.

The short point is that there are no quick fix solutions. The government cannot possibly be hoping for greater flows of foreign direct investment (FDI) to work their magic into the larger domestic industry within a short period. Perhaps, as FDI funded industry starts operations, banks will be inclined to reassess their risk perception of down stream corporates, simply because of their linkages with big industry. It may take time for the jigsaw to fall into place but grousing against big industry is self defeating.