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Sustainable financing of MSMEs

RK Das


In order to enhance sustainable financing in India, there is a need to develop institutional competencies to ensure that industry projects are fully evaluated for sustainability risk.

|28| India-China Chronicle  November 2011

ustainable management aims at managing ecological, economic and social effects, firstly, to achieve a sustainable development of the organization and the core business, and secondly, to create with its business a positive contribution to society at large. In simple terms, sustainability is the way firms integrate social, environmental and economic concerns into their values, culture, decision making, strategy & operations in a transparent & accountable manner. Many global players in developed countries have adopted international norms for sustainable banking, such as: The UNEP Finance Initiative (UNEPFI) suggests integrating environmental considerations into the regular business operations, asset management, and other business decisions of the banks. IFC – Equator principle – A common standard of project finance that incorporated environmental and social issues. Collevecchio Declaration on Financial Institutions – pro-active role by financial sector that value communities and the environment. Micro, Small and Medium Enterprises (MSMEs) have become synonymous with growth, innovation and productivity. These enterprises are often credited with achieving greater viability and profitability compared to larger competitors by leveraging their size and dynamic business models. As large enterprises and corporates move towards CSR (corporate social responsibility), the focus is shifting towards MSMEs to align themselves towards responsible and sustainable business operations. CSR by MSMEs offers a huge opportunity, given that 95 per cent of all registered enterprises are MSMEs and that it is the second largest source of employment. Unlike large industries which are often concentrated in a given area, there are around 6600 MSME clusters spread across India producing more than 6000 products, supplying to larger manufacturers as well international markets. CSR initiatives by MSMEs can have a much

sustainability is the way firms integrate social, environmental and economic concerns into their values, culture, decision making, strategy & operations in a transparent & accountable manner wider reach and impact on society. Limited finances and wherewithal of MSMEs has often been cited as a barrier towards CSR initiatives. However, it can be countered that the entrepreneurial spirit which helps MSMEs become globally competitive can also be directed towards their CSR initiatives. There are a number of simple and cost effective measures that can be taken to mitigate impact of business activities on the environment. The sector also contributes greatly

towards reducing regional disparity and thereby raising socio-economic empowerment level. The sector comprises more than 30 million enterprises creating more than 70 million employments – thus emerging as the second largest source of employment in India after agriculture. It is estimated that in terms of value, the MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country, directly and indirectly. MSMEs have a significant potential to improve the ecosystem and conserve the environment. Given the geographical extent of MSMEs, initiatives for reducing pollution can result in substantial improvements across the country. Various developing countries and advanced countries like the US, EU and Japan use compliance to various norms as a Non Tariff Barrier (NTB), such as, protecting human, animal and wild life, protecting plant health, human safety, human health, environment, etc. All these barriers are part and parcel of the enterprise’s sustainability. There have been instances in the recent past that the US and the EU have rejected the export from India

November 2011  India-China Chronicle |29|


due to noncompliance to the above sustainability norms. Exporting MSMEs should not see the compliance to sustainability norms, i.e. environment and social protection as a cost, but it should be seen as a competitive advantage. Since any enterprise, be it a micro, small or medium set up to grow their respective size, profit and turnover, etc; the improvement in sustainability compliance is the opportunity which secures future business. Large and medium enterprises should create an environment in the business dealing and motivating their ancillary small enterprises to slowly move towards international standards. Sustainable finance is the key to promote sustainability in the MSME sector by way of supporting these MSMEs to select technologies which achieve higher energy efficiency and less damage to the environment, also reduce wastage to improve resources utilization. The need of the hour is that while financing MSMEs there should be concern on the manufacturing process and technology being used by MSMEs and also on techniques being used to

adopt the concept of Reduce (waste), Reuse and Recycle. Green financing aims to develop long term and sustainable adoption of eco-friendly business operations by MSMEs. For this, economic feasibility is an essential need, without which none of the initiatives suggested will evince interest from the MSMEs. Initiatives under Green Financing result in direct or indirect lowering of costs either through reduction in wastage or enhancement of efficiency or lowering the energy consumption. The immediate impact of Green

Financing is seen by businesses in their bottom lines and this gives them greater motivation to continue and enhance their focus on such measures. Banks and financial institutions, key lending organizations to MSMEs, will have to shoulder the responsibility for sustainable development. It is expected that lending institutions demonstrate more concern towards the negative externalities and risk generated by projects financed by them and take on greater responsibility for mitigation of the same. Banks and financial institutions will be required to monitor the environmental compliance by MSMEs financed by them. SIDBI has all along laid thrust on holistic support for sustainable enterprise development and emergence of competitive MSMEs. With its commitment to responsible banking and addressing the issues of climate change, SIDBI has integrated environment, energy efficiency and social standards with its lending activities. The Bank recognizes that sustainable development is the key to MSMEs survival and growth in the long run and as a principal & responsible Develop-

ment Financial Institution engaged in promotion, financing & development of Indian MSMEs, SIDBI have since inception acted proactively in the area of sustainable development of the MSME sector. SIDBI is also leading in the area of sustainable finance to MSMEs through energy and environment based loans, viz. loans for investment in clean technology, energy efficient equipment and environment protection at concessional interest rates. SIDBI has raised dedicated energy efficiency/ environment lines of credit from Japan International Cooperation Agency ( JICA) Japan, Kreditanstalt fur Wiederaufbau (Kf W) Germany, and AFD, France, for such loans. The country’s first aggregative CDM project which is expected to provide MSMEs with additional revenue from carbon credits is being carried out on an experimental basis in steel re-rolling units in Jodhpur. SIDBI provides green financing for specific categories, like replacing old taxis with CNG fitted machines (additional income of USD 45-50 per month and improving the social status of more than 1000 taxi drivers), auto rickshaws fitted with CNG kits (aggregate reduction of 850 tpa CO2 emissions), 500 cycle rickshaws to the poor enabling them to earn a self-sustainable living, 5000 solar lamps (to reduce health hazards) in the remote/underdeveloped areas, etc. SIDBI has also partnered with the Ministry of MSME, Bureau of Energy Efficiency, Ministry of Power, Government of India and World Bank Global Environment Facility for implementing energy efficiency (EE) measures in MSME clusters. SIDBI has been successful in showcasing to the MSME sector through one of it’s impact studies that small investments in EE can result in 15-20 per cent energy saving and 40 per cent improvement in productivity. Besides energy efficiency, SIDBI is also trying to improve the environmental and social (E&S) standards in the MSME sector through the World Bank Line of Credit (LoC). It is also addressing capacity building concerns of credit officials and have trained more than 130 credit officials on the environ-

Loans for Investment

Clean Technology Energy Efficient Equipment Environment Protection

ment and risk assessment framework. SIDBI has released several energy efficiency booklets and also supported the ISTSL to prepare a Carbon Credit Guidebook for MSMEs and update its existing basket of 800 carbon free, clean, energy efficient technologies adoptable by MSMEs. In order to attend to challenges of information asymmetry, SIDBI has brought out a knowledge series on energy efficiency in fruit & vegetable processing, ceramics and engineering clusters. These along with a “Tip sheet on Energy efficiency” (providing simple housekeeping) tips to MSMEs have also been widely disseminated. The World Bank in collaboration with SIDBI and the Bureau of Energy Efficiency (BEE) is implementing a new initiative called the World Bank Global Environment Facility (GEF) project on financing EE in MSME industrial clusters to improve EE and reduce green house gas (GHG) emissions from MSMEs utilizing increased commercial financing for EE. The above initiative envisions supporting five clusters viz. Kolhapur, Pune, Tirunelveli, Ankleshwar and Faridabad in India by providing assistance for energy audits, preparation of detailed project reports (DPRs) and support in mobilization of financing from Indian local banks to ensure that the identified EE measures are implemented. Green Rating To promote green rating in the MSME sector, SIDBI, in association with SMERA, launched a pilot

incentive scheme called Green Rating for the first time in the country to encourage MSMEs to get their manufacturing facilities rated on environmentally sustainable parameters. The rating establishes compatibility of an industrial unit in adhering to manufacturing process resulting in efficient use of resources with minimum environmental damage. In addition, SIDBI also extends rebate on interest rate up to 50 bps to all units rated “SMERA Green Rating-3” and above. In order to enhance sustainable financing in India, there is a need to develop institutional competencies to ensure that industry projects are fully evaluated for sustainability risk. It is desired that sustainability measures be integrated into business and lending policies of banks and financial institutions for greater effectiveness in environmental performance. This is expected to become the core competence and competitive advantage of future financial markets in India and will make MSME sustainable, viable and competitive in the future. 

RK Das is the General Manager of SIDBI. He acknowledges the contribution of Amit Sethi, Manager, SIDBI towards this article. The views expressed are those of the author, not SIDBI.

November 2011  India-China Chronicle |31|

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