K C Chakrabarty: Microenterprise development - path to creating MNCs
of tomorrow
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
Citi Micro Entrepreneur Awards Ceremony, organised by Citi Bank, Mumbai, 5 December 2011.
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Assistance provided by Smt L. Vadera in preparation of this address is gratefully acknowledged.
Mr. Pramit Jhaveri, CEO, Citi Bank, India, Dr Isher Judge Ahluwalia, Chairperson, ICRIER,
Mr Haresh Shah, Chairman of Confederation for the promotion of Khadi and Village
Industries, Mr Anami Roy, ex-DGP( Maharashtra) and Chairman Vandana Foundation,
Ms Radhika Haribhakti, Chairperson, Swadhaar Fin Access, distinguished guests and
winners, ladies and gentlemen. I am extremely happy to be here for the annual Citi Micro
Entrepreneur Awards Ceremony. First of all, I would like to congratulate all the awardees
who have come from various parts of the country. These awards recognize and celebrate the
superior performance of the recipients. Coming as it does from an eminent jury, they fully
deserve our wholesome applause and accolades. We hope their performance and
achievement will serve as a beacon to others to emulate and perhaps even exceed.
I would also like to compliment the organizers of Citi Micro Entrepreneur Awards, i.e. Citi
Bank especially Mr Pramit Jhaveri and other members of his team for recognizing and
honouring exemplary micro entrepreneurs who have overcome all challenges to successfully
build self-sustaining micro enterprises, creating employment and contributing meaningfully to
the economic growth of the country. The conferring of these awards also entitles micro
entrepreneurs an opportunity to receive training in business development in order to develop
and grow in to "state of the art" micro enterprises. It is universally acknowledged that great
opportunities open up if one is well trained and skilled. Entrepreneurs need not necessarily
be born, but can be developed through well-conceived and well-directed activities.
Spearheading entrepreneurship movement throughout the nation is the need of the hour and
I compliment Citi Bank for their commendable initiative in providing support to skill and
knowledge building of the micro enterprises. Moreover, today's winners will serve as role
models who could inspire and mentor future generations of entrepreneurs.
Importance of micro and small enterprises
In a developing nation's economy, it's the small and micro enterprises which play a vital role.
If India has to have a growth rate of 8-10 percent for the next couple of decades, it needs a
strong micro and small sector and micro entrepreneurs need to be nurtured. They not only
give employment to a large number of people but also support bigger industries by supplying
raw material, basic goods, finished parts and components, etc. The felicitation of micro
entrepreneurs today, is not to be mistaken as the ultimate goal of the enterprise. It is in fact,
only the beginning of its process in achieving greater heights. A small enterprise today will be
a big enterprise tomorrow, and might well become a multinational enterprise eventually, if
given the support, among others, to build their skills and knowledge levels. In MSME sector,
the failure rate may perhaps be relatively higher - the reasons for which range from delayed /
inadequate availability of credit to non-availability of backward and forward support system.
Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and
growth. Thus, the banks and other agencies should take pride while servicing the micro
entrepreneurs as they are playing an instrumental role in the formation of MNCs of tomorrow.
There is a need for sensitization of the bank's staff towards the needs of small
entrepreneurs. The banks should develop systems such that the field staff is regularly
updated and is equipped to appraise the financial requirements of small enterprises. The
banks may use the platform provided by the technical institutions and send their staff to such
institutions on a regular basis. Training is also required to be imparted to the branch
managers and their loan officers for change in their mindset away from the perceived risk in
financing micro and small enterprises.
Need for microenterprise development
It is increasingly recognized that microenterprise development forms an essential element in
the promotion of broad based, inclusive growth and improvement in the well-being of the
poor by providing significant income - and employment-generating opportunities, and
encouraging indigenous investment. Microenterprise development projects can serve four
major objectives: (i) poverty reduction; (ii) the empowerment of women; (iii) employment
generation; and (iv) enterprise development as an end in itself. Microenterprise development
contributes to widening the pool of entrepreneurship available to the society. Thus, there is a
need to strengthen the linkages between policy environment and entrepreneurship. The
21st century has been acknowledged worldwide as the "knowledge century" and "knowledge
society" can play a greater role in taking India forward. In countries where the number of
medium and large-scale enterprises is sparse, the importance of microenterprises as an
incubator of new enterprises becomes even more important. In fact, development of
microenterprises is a fertile source of entrepreneurship for the future, a sort of seedbed for
the universe of enterprises.
We are a very young nation - just over 60 years since independence - setting out on a path
of sustained economic growth, for decades to come. We already have over a billion fellow
Indians. As per the National Commission on Population, the age-wise distribution of the
population of India is going to change significantly in the coming years. By 2016,
approximately 50 per cent of the total population will be in the age group of 15-25 years.
Thus, there would be a tremendous increase in the number of youth entering the education
and job market in the ensuing years, which will result in increase in demand for skill
development. On an average, it is estimated that around 1.5 crore persons per annum would
enter the employment market during the next 30 years. Each person, in this bold new
generation, will be in the prime of his or her life, striving for a better tomorrow - creating, in
the process, new growth opportunities, for budding entrepreneurs! This burst of
entrepreneurship across the country, spanning rural, semi-urban and urban areas has to be
nurtured and financed. It is only through growth of enterprises across all sizes that
competition will be fostered. Thus, entrepreneur development should be seen as an
investment for economic development and prosperity, since knowledge and information
would be the principal driving force for economic growth in the coming years.
Much of the vast and growing population of the country forms part of the economy that lies in
what is known as the unorganized sector. It is generally agreed that the unorganized sector,
whether rural or urban, comprises small scale and microenterprises producing and
distributing goods and services. These enterprises are generally independent, largely family
owned, employ low levels of skills and technology, and are highly labor intensive. It is
imperative that we nurture and develop microenterprises in view of their significant
contribution to achieving equity as well as economic growth, and efforts to address gender
and poverty reduction issues. With economic reforms in the country, and with the virtual
removal of all trade barriers, the world is now our market - and our opportunity! The pursuit
of these opportunities requires an indomitable spirit aimed at nurturing entrepreneurship.
In India, there is a dearth of skilled people in micro small enterprises, which demands
entrepreneurship development programmes throughout the country for the growth of Indian
economy. At present, there are various organizations at the national and State levels offering
support to entrepreneurs in various ways. The Government of India and various State
governments have been implementing a number of schemes and programmes over the
years. A continuous effort from the society is also needed, where citizens are encouraged to
come up with their entrepreneurial initiatives. Going forward, we must develop an attitude
that views innovation positively.
Lessons from emerging countries
We should learn from the experience of Korea which has now become a leader of many
globally important brands. However, barely forty years ago, Korea had no industry at all. The
Japanese, who ruled Korea for decades, did not allow any. They also did not allow any
higher education, so there were practically no educated people in Korea. By the end of the
Korean War, South Korea had been destroyed. Today Korea is world-class in two dozen
industries and the world's largest in ship building and other areas. Not far behind Korea is
Taiwan, which like Korea was preindustrial in 1950. Today, Taiwan is a world leader in a
number of high-tech areas, including microchips. Entrepreneurship and innovation are the
key drivers of success in these two counties and turned them into world class manufacturers
and industry leaders. The Koreans have set up small groups of their brightest people to
systematically apply the discipline of innovation to identify and develop new businesses.
Innovation requires us to systematically identify changes that have already occurred in the
business - in demographics, in values, in technology or science - and then look at them as
opportunities.
Four pitfalls to avoid
Many new businesses start out with high promise but suddenly run into trouble after a year or
two. There are four typical mistakes entrepreneurs make and all four are foreseeable and
avoidable. Here, I draw extensively from what Peter F. Drucker has very rightly pointed in
one of his books. He said that there are four typical mistakes entrepreneurs make. Firstly,
majority of successful new inventions or products do not succeed in the market for which
they were originally designed. To illustrate the point, I would like to tell you of a man by the
name of John Wesley Hyatt who invented the roller bearing for the axles of railroad freight
cars. The railroads, however, were not ready for radical change; and Mr. Hyatt went
bankrupt. Then Alfred Sloan, the man who later built General Motors, asked his father to buy
Hyatt's bankrupt business. Unlike Hyatt, Sloan was willing to broaden his vision of the
product. It turned out that the roller bearing was ideal for the automobile, which was just
coming to the market. In two years Sloan had a flourishing business; for twenty years
Henry Ford was his biggest customer. Similarly, very few would know that Novocaine was
invented by a German chemist, Alfred Einhorn for use as general anesthetic in major surgery
but it was not found suitable and ultimately it was used successfully by dentists. In fact,
Peter Drucker had said that majority of successful new inventions or products do not
succeed in the market for which they were originally designed.
Secondly, entrepreneurs believe that profit is what matters most in a new enterprise. But
profit is secondary. It is the cash flow that matters. A business that grows fast devours cash.
Constant investments have to be made to just keep even.
Thirdly, when a business grows, the person who founded it gets too busy. Rapid growth puts
an enormous strain on the business. It outgrows its production facilities and management
facilities. The quality falls, customers do not pay and deliveries are missed. The best way
avoid a crisis is to create a management team. Young entrepreneurs cannot pay to bring in a
management team. So it is necessary to identify the core competencies of the people
working with you. One may be good at marketing, the other, say in, customer service. They
have to be utilized for their respective competencies to be able to deliver their optimum. This
planning should take place well in advance.
Lastly, when the business is a success the entrepreneur needs to ask what the business
needs at this stage and whether he is concentrating on the right things. While
entrepreneurship starts by putting himself before business and questions that are at the
forefront is "What do I want to do?" or "What is my role?" , but when it succeeds the right
questions to ask is "What does the business need?" and "Do I have these qualities?" As
successful entrepreneurs, having gained experience and wisdom from past mistakes, going
forward, it is necessary to ensure that the same mistakes are not repeated. First generation
entrepreneurs can also take a lesson from the successful entrepreneurs to avoid committing
the same mistakes.
Support from all stakeholders
There are ample opportunities in small businesses in India and such opportunities will
transform the country in the coming future. For such transformation to happen there needs to
be support from all stakeholders, government, banks, corporate, regulators, civic society, etc.
Technology universities may be set up and the government can tie up with the best in the
world to help in research. We need to harness entrepreneurship and look at skill building. A
scheme for utilizing NGOs to provide training services to tiny micro enterprises could be
encouraged. Entrepreneurship development is important in view of its visible impact on
wealth creation and employment generation. To facilitate and encourage this, skill building
has been impressed upon by the Prime Minister's Task Force for MSMEs. Enterprise
Development Centres (EDC) should be set up by the Central / State Governments with
incubators to provide training not just for setting up of new units but also to provide
continuing education on different aspects like product design, packaging, technology
upgradation, financial management and marketing. Entrepreneurship development is the key
factor to fight against unemployment, poverty and to prepare ourselves for globalization in
order to achieve overall economic progress.
Initiatives by government of India / Reserve Bank of India
As the level of financial exclusion is very high in the sector, Government and Reserve Bank
of India are taking the lead in facilitating access to finance by increasing the outreach of
banking facilities to unbanked centers. Financial access is critical for MSMEs growth and
development. With an objective of ensuring uniform progress in provision of banking services
in all parts of the country, banks have been advised to draw up a roadmap to provide
banking services through a banking outlet in every unbanked village having a population of
over 2,000 by March 2012. Such banking services need not necessarily be extended through
a brick and mortar branch but could be provided through any of the various forms of
Information and Communication Technology (ICT)-based models, including Banking
Correspondents (BCs). About 74,000 such unbanked villages have been identified and
allotted to various banks through State Level Bankers Committees (SLBCs). As at the end of
September 2011, as reported by the State Level Bankers' Committees of various states /
Union Territories, banking outlets have been opened in 42,079 villages across the various
States in the country. This comprises of 1127 branches, 39,998 BCs and 954 other modes
like rural ATM, mobile van etc.
Further, the Reserve Bank of India has also advised banks to roll out the Financial Inclusion
Plans (FIP), encouraging multiple channels of lending and enhancing the scope of the
Business Correspondent model, improving credit delivery procedures in micro and small
enterprises (MSE) sectors and encouraging adoption of ICT solutions in villages with
population less than 2000.
Both at the district and State level, Reserve Bank has advised the State Level Banker's
Committee meeting and the Lead banks to monitor initiatives for providing "credit plus"
services by banks and State Governments. Given the importance of capacity building,
Reserve Bank of India has impressed upon banks on the need for financial education to
enable small and marginal borrowers to avail of the entire suite of financial products and
services i.e., savings, remittance, insurance and pension from the banking sector, in addition
to credit. The banks have been advised to set up Financial Literacy cum Credit Counselling
(FLCC) centres in all districts. As on March 2011, 252 FLCCs were set up in various states of
the country. The Ministry of Rural Development (Government of India) embarked upon a
major initiative to set up one Rural Self Employment Training Institute (RSETI) in each district
of the country to provide training to the rural Below Poverty Line (BPL) persons and ensure
wage employment / self-employment to them. Ministry of Rural Development would provide
assistance to establishment of 200 RSETIs. Public Sector Banks have been advised by
Reserve Bank of India to associate with the Scheme to ensure credit linkage to the people
who are trained by the RSETIs.
The banks have also been advised the SLBC convenor banks, in consultation with State
Governments, to formulate a scheme for utilising specified NGOs for providing training and
other services to tiny micro enterprises, To leverage bank credit for inclusive growth bank's
have been advised to develop linkages with such NGOs / Corporate houses operating in the
area to ensure that the NGOs / Corporates provide the necessary "credit plus" services. In
fact, success stories could be presented in DCC / SLBC meetings to serve as models that
could be replicated.
Each SLBC has been advised to have a dedicated Financial Literacy Division to propagate
the various instructions and use the local media to frequently interact with the Financial
Literacy Division and take their help to reach out to the common persons.
To ensure enhanced credit flow to the sector, in terms of the recommendations of the Prime
Minister's Task Force on Micro, Small and Medium Enterprises (MSMEs) (Chairman:
Shri T.K.A. Nair, Principal Secretary, Government of India) constituted by the Government of
India, banks were advised to achieve a 20 per cent year-on-year growth in credit to micro
and small enterprises; the allocation of 60% of the MSE advances to the micro enterprises is
to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in
the year 2012-13 and achieve a 10% annual growth in number of micro enterprise accounts.
The Reserve Bank is closely monitoring the achievement of targets by banks on a quarterly
basis.
Further, based on the recommendations of the Working Group (Chairman: Shri V.K. Sharma,
Executive Director, RBI) constituted by the Reserve Bank of India to review the Credit
Guarantee Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE), the limit for collateral free loans to the MSE has been increased from
the present level of Rs. 5 lakh to Rs.10 lakh and it has been made mandatory for banks.
On the issue of alternate sources of credit and infrastructure the PM's Task Force has
examined the issues and has made several recommendations to address the bottlenecks.
The implementation of the recommendations in a time bound manner is being monitored by
the GOI. In terms of the recommendations of the Prime Minister's Task Force the proposal
for setting up venture capital / risk capital Funds are being examined by the Government of
India and a dedicated exchange for MSMEs would be
Conclusion
Let me end by once again congratulating the recipients of this award function and wishing all
of you all the very best. I hope that the award ceremony will inspire all to strive for excellence
and thus contribute towards achieving greater heights in building a strong and prosperous
India. I would also like to congratulate Citi Micro Entrepreneur Awards for saluting exemplary
micro enterprises and wish them greater successes in days to come in identifying more and
more such entrepreneurs throughout the length and breadth of our country.
Thank You.
References:
1. Peter F.Drucker: "Managing in the next Society", Truman Talley Books, St. Martin's
Press, New York.
2. Asian Development Bank (1997): "Micro Enterprise Development: Not by credit
alone".
3. Do Bato: Scope of Entrepreneurship Development in India.