High-risk, unorganised sector can now bank on govt

High-risk, unorganised sector can now bank on govt

Smita Aggarwal

Posted online: Friday, August 15, 2008 at 0058 hrs Print Email

ELECTION-YEAR move z Government to set up funds for small businesses to woo population engaged in informal sector

New Delhi, August 14: The government has decided to set up the country’s first bank aimed at providing credit to small businesses in the informal sector, considered to be high-risk and credit-unworthy, at subsidised interest rates. The bank, to be called National Fund for Unorganised Sector or NAFUS, will provide credit to around 59 million or more small businesses. In an election year, this is seen as a move to woo a large chunk of population engaged in the country’s informal sector that has attained renewed priority now.

The bank, on lines of existing development financial institutions like NABARD and SIDBI, will enable a wide array of entrepreneurs to get credit, ranging from a corner-shop paanwallah, neighbourhood kirana store-owner to a dhabha owner, for an amount as low as Rs 10,000. In what is a first, the proposed bank will also extend loans to end-users for paying interest on existing loans, borrowed from elsewhere. “The main uses of fund are for refinance, interest payments on borrowed money, promotional and developmental support, and administrative expenses,” notes the draft cabinet note, prepared by ministry of micro, small and medium enterprises. Earlier, the UPA government had made an announcement in its National Common Minimum Programme for setting up a national fund for unorganised sector.

In the first year of its operations in 2007-08, the estimated quantum of credit disbursement to such small enterprises engaged in non-farm activities, with investment in plant and machinery up to Rs 5 lakh, is pegged at Rs 132.62 billion. For larger enterprises, those with investment in plant and machinery upto Rs 25 lakh, the total credit disbursement target is estimated to be Rs 154.73 billion. In all, during the Eleventh Five Year Plan, the government is targeting total credit allocation of Rs 1461.43 billion and Rs 1919.05 billion for enterprises with an investment of Rs 5 lakh and Rs 25 lakh respectively. The proposed interest rate is 7 per cent, with government providing interest subsidy of 2 per cent.

According to government estimates, the higher credit flow from NAFUS to the informal sector would create a total of 32.5 million additional businesses in the sector and provide enhanced employment to 57.5 million during the Eleventh Plan period alone. For setting up of NAFUS, the government plans to introduce a Bill in the Parliament. The proposal was likely to come up before the Cabinet soon, said a source.