Day 66 – Q 2. Credit availability is one of the most crucial factors in any industrial policy. In the light of this statement, examine the status of credit as an enabler and impediment of industrial growth in India. 

2. Credit availability is one of the most crucial factors in any industrial policy. In the light of this statement, examine the status of credit as an enabler and impediment of industrial growth in India. 

क्रेडिट उपलब्धता किसी भी औद्योगिक नीति के सबसे महत्वपूर्ण कारकों में से एक है। इस कथन के आलोक में, भारत में औद्योगिक विकास के सम्बल या अवरोध के रूप में ऋण उपलब्धता की स्थिति की जाँच करें।

Demand of the question – Briefly write about the first statement of the question and then examine role of credit as enabler and impediment of industrial growth in India in light of the above given 1st statement of the question.

Introduction

The role of credit in development in general and industrial development in particular has seminal importance where world over financial policies have been designed and adopted as per the needs of countries to achieve rapid industrialisation.

Body

• Financial liberalisation as a part of the comprehensive reform programme was introduced in 1991 in India. The essence of the liberalisation programme was to ensure that the market plays a decisive role in allocating resources especially credit resources.
• In this regard, credit as an enabler of industrial growth can be seen from following points:

1. 1. India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. 
   2. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities.
   3. The Government of India has introduced several reforms to liberalize, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). 
   4. These measures include launching Credit Guarantee Fund Scheme for MSMEs, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by Government and private sector, India is undoubtedly one of the world’s most vibrant capital markets. 
   5. In 2017, a new portal named ‘Udyami Mitra’ was launched by Small Industries Development Bank of India (SIDBI) with an aim to improve credit availability to MSMEs in the country. 
   6. According to CARE ratings, credit growth has even surpassed the growth in bank deposits (6.1 per cent), one of the major factors that constrained liquidity in the banking system in recent months where Large industries account for more than 80 per cent share in the total disbursement of credit to industries. This is followed by micro and small industries (13 per cent) and medium industries at 4 per cent.

But at the same time, since independence the underdeveloped credit sector was perceived to be the reason behind inadequate financing for industrial sector. Further, its role as an impediment of industrial growth can be seen from following points:

1. There seems to an asymmetry which is widening both in terms of the nature of financial requirements of the industrial sector and the financial institutions and agencies that emerged during the post-liberalisation period in India.
2. The cost of capital plays a key role in the process of industrialisation; as unavailability of affordable capital has often been identified as a key factor that causes adverse impacts. The cost of capital affects both the large and the small firms in different ways where in India the cost of capital has still remained high.
3. The size and depth of the corporate debt market in India continues to remain small in comparison to those in developing countries like Brazil and China. It is also small in comparison to several bank based financial systems like Germany and Japan.
4. Despite several policy measures to boost the performance of the equity market, the performance of the primary market has not been up to the desired level.
5. There has been a structural shift in bank credit from the industrial sector to the retail sector, according to CARE Ratings. The share of industrial sector in total outstanding credit declined from 40-45 per cent between FY10 and FY16 to nearly 30 per cent at present.
6. This shift, according to CARE, can be attributed to the change in focus of banks to lend to the retail sector, where the probability of delinquency is lower, compared to the industrial sector, which has relatively higher levels of non-performing assets (NPAs).

Way Forward-

• A necessary condition for the process of credit availability is the evolution of a deep and liquid corporate debt market.
• Harness household savings into risk capital for industrial growth where institutional intermediaries can be developed to tap these funds.
• For a knowledge-based banking and better management of information, it is necessary to tailor the new institutional funds to long term investments.

Conclusion

Changes in the economic environment in which banks and businesses operate such as domestic and cross‐border consolidation of the banking industry have heightened concern about the availability of credit to businesses. The panacea to the present challenges in industrial financing hinges on the ability to design an appropriate mix of the bank- and the market based systems of financing.