Mediating effect of utilisation in the relation between loan services from PSBs and capital formation of MSMEs: a study of Purba and Paschim Medinipur districts of West Bengal

MSMEs have been considered universally as an engine of economic growth and a key instrument for promoting equitable development. They have emerged as a vibrant and dynamic sector and as an engine of growth for the present millennium. The sector has been playing a prominent role in the socio-economic development of the country for the past six decades. The sector which forms part of the total industrial sector has direct impact on the growth of the national economy. In fact, through the establishment of a more flexible, innovative, and competitive structure, the small enterprise sector is being accepted as a key instrument to sustainable economic growth. This growth of MSME sector also contributes drastically in the development of entrepreneurial skills among the people, decentralisation of ownership, eradication of monopoly power in the market, avoidance of concentration of wealth and power, and to make sure the balanced economic and social development of the country.

Countries like India that are overpopulated and industrially progressive are highly depending on this sector for promotion of employment amenities for the citizens of the country and attaining the balanced economic and social development of the country.

Government’s initiatives enable MSMEs to enhance their competitive strength, competitive challenges, and avail benefits at the global market. PSBs had pre-conceived basket of products and services made available to the public, and they also established instruments of social change and have played a pivotal role in developing the MSME sector. The share of public sector banks lending to the sector has expanded rapidly, though the annual report of banking sector shows that the NPA (Non Performing Asset) is escalating day by day because of defaulters from the majority of MSME entrepreneurs especially from the micro-entrepreneurs. As majority of the MSMEs do not maintain proper financial statements of their transactions and operate in a turbid manner, the opaqueness of the firms makes it very difficult for them to avail formal credit.

Therefore, in this paper, keeping in our mind why they are not able to pay back the loan, we investigate the utility and utilisation of loan received from the different banks in the MSME sector. In this background, the present study is chosen to explore factors considered under the utility of loan services provided by the public sector banks. With this, the authors have tried to establish a relation between the factors under the utility of loan, utilisation of fund, and capital formation in the MSMEs.

Basu (1957), in his study, made an attempt to examine the financial problems of small-scale industries and assessed their place in the country’s Second Five Year Plan. The study pointed out the inadequate role of state finance corporations in financing the small-scale industries. Sharma (I973), in his PhD thesis entitled ‘Role of Institutional Finance in the Industrial Development of Bihar’, explained industrial financing by national-level financial institutions. The study also discussed the role of the state financial institutions in financing industries of Bihar. The author suggested that the financial institution should act as a guide, philosopher, and promoter of industries and recommended the setting up of small industries bank. Pareek (1978), in his work titled ‘Financing of Small-scale Industry in a Developing Economy’ revealed the role of financial institutions and state agencies in extending credit to small-scale units and pinpointed their attitude of indifference in catering to the need of the tiny units. He suggested that financial institutions had to tune their policies in consonance with the needs of a small-scale sector in general and the smaller among small-scale units in particular. Singh (1986) in his study titled ‘Financing of SSI in India’ made an analytical survey of the institutional sources of finance to the SSI and other small and tiny units, after critically examining the various aspects of the functioning of the financial institutions for the growth of the small-scale sector. Raghurama (1991), in his PhD thesis titled ‘Role of Commercial Bank in Financing SSI - A Case Study Dakshin Kannada’, tried to analyse the problems faced by small-scale units while availing the bark finance. The problems faced by the bankers and the procedures adopted by the bank in extending finance are also examined. Park and Krishnan (2001), in their article titled ‘Supplier Selection Practices among Small Firms in the United States: Testing Three Models’, observed that the commercial banks came forward and made immense help to the growth of SMEs. There was a gap which required analysis about the role of the banks in the post-economic reforms. They suggested an in-depth study on the banker’s role in providing the credit to promote the SMEs. Sundar, Gandhi. Kumar, and Gangatharam (2002), in their article titled ‘The Role of SIDBI in Financing SSIs’, studied the role of SIDBI in meeting financial requirement of small-scale industries through its various loan schemes. On the basis of this study, they concluded that the role of SIDBI in providing financial assistance was generally commendable both in terms of number of schemes sanctioned and the quantum of loans disbursed over a period of 8 years. Tarun (2004) conducted a study on CSR in Industrial Areas/SMEs: Activities, Policies and Strategies in New Delhi, Business Community Foundation. A comprehensive review of literature is an essential part of any investigation as it not only gives an idea about the work done in the past and assists in delineation of the problem area but also provides a basis for interpretation of findings. Accordingly, the available relevant literatures on MSME have been reviewed with reference to their financial as well as other related aspects. Kotler and Lee (2005), in their article titled ‘CSR – Doing the Most Good for Your Company and Your Cause’, New Jersey: John Wiley and Sons Inc., emphasised more on the needs and feasibilities of MSMEs and also estimated how relevantly the MSMEs emphasise the use of inherently available local resources in industrial development, but the contents, though touch upon the availability of financial resources for their surveillances, do not penetrate much about the role and effectiveness of bank finance in this respect. Chaniyara (2012), in his PhD thesis entitled ‘A Study on Role of Investment Banks for Development of Indian Small and Medium Enterprises’, stated as outcome of the study, with the help of investment bank’s services like private placement of equity, business advisory services, and merger and acquisition, the Indian SMEs could overcome so many challenges like inadequacy of requisite R&D support, constraints in adopting energy efficiency in production process, non-availability of adequate and timely credit, inability to upgrade technology and production facilities to achieve cost competitiveness, lack of proper means and support for brand building, and non-availability of skilled personnel. Kavitha Vani. (2015), in his PhD study entitled “A study of finance gap between commercial Banks and micro, small and medium enterprises with reference to Karnataka”, made an attempt to address the issue by analysing the problem from the perspective of supplier of finance and demand for finance. The main finding of the study was that the finance gap which was there in Karnataka was perceptional gap between banks and SMEs that resulted in high financial exclusion. Sen and Salim (2016)’s study dealt with the importance of MSMEs in West Bengal. They examined the performance with respect to number of units, investment, and employment generation. The study observed the existence of regional disparity among districts of West Bengal in respect of MSME units, investment, and employment. The study concluded with some suggestions for industrial clusters with the government. Industrial clusters might ensure the common facilities that would be helpful to reduce the operating cost, increase the competitiveness, and develop the skills for the sector. Also, government was needed to enhance financial support which would be strongly boosting the development of state industry. Das and Das (2017), in their research paper, made an attempt to explore the operational and economical characteristics of micro-manufacturing enterprises (MMEs) and their status of development in particular in context of West Bengal. On the basis of 67th round NSSO unit level data, the study found that MMEs in West Bengal made important contribution towards the employment generation and output of the state economy. Approximately 10% of the output of India was produced in the West Bengal state. The productivity of MMEs was comparatively higher than the OAEs (own account enterprises), but the profit rate was comparatively higher in OAE than in the MME. The study suggested that the government should invest in the introduction of new technology and provide them proper training. Biswas, Srivastava, and Kumar (2018), in their article, made attempts to identify various factors that influence the financing gap in the MSME sector and which lead to the imposition of credit rationing approach by the banks. The paper was mainly review based and the author did a descriptive survey carried out on the bank officials in the districts of Varanasi and Chandauli. According to authors’ suggestion, it is necessary for the MSME entrepreneurs to reduce information asymmetries between the borrower and the lender by operating in a transparent manner and increasing their probability of availing formal credit to reduce the financing gap in the MSME sector.

The data analysis has been done using various statistical tools like independent sample t test, Levene’s test, Mahalanobis D², Cook’s distance test, Shapiro-Wilk test, Harman’s one-factor test, correlation, factor analysis, and multiple regression analysis. Also, the data analysis has been done using Path Analysis developed by AMOS software. Before going to develop a model using Path Analysis, the researcher has used some test to check whether the data is clean and ready to go for multivariate analysis or not.

From Table 12, it is found that there are positive significant correlations between all the factors of utility of loan services and the capital formation. The correlation range is 0.413 to 0.588. That is, the factor ‘accessibility’ is highly positively associated and ‘availability’ is lowly positively associated with capital formation.

Regression fitted: capital formation = 7.269 + .099 (availability) + .184 (accessibility) + .316 (expected reliance) + .199 (facilities) + .221 (terms and conditions)

The value of R is 0.772 and the value of R² is 0.597 in the model. It states that 59.7% of the capital formation can be attributed to loan service. The regression result indicates that there is a strong direct positive relation between loan service and capital formation with significant value less than 0.01. Thus, the alternative hypothesis H₁₁ is accepted, and the null hypothesis H₀₁ is rejected (Tables 13 and 14).

Let us examine the role of utilisation of loan fund acting as a mediator to the relationship between the factors of loan service and capital formation. Path analysis has been used to check the abovesaid relationship (Fig. 4). The independent variables and moderator variable are the same like the previous one. But here, capital formation acts as dependent variable.

From Table 15, the regression weight of path analysis noticed that eight out of 11 path coefficients are significant in order to the significant level of p value. Therefore, it is found that all the factors are directly influencing the utilisation but only two factors are directly influencing the capital formation. In Table 16, we have also found that the utilisation of fund has been generating an additional indirect effect to the relationship between the utility of loan service and capital formation. Therefore, the utilisation of fund works as a mediating variable in this relationship.

Utilisation of loan is playing a mediating role in the relation between utility of loan service and capital formation. Entrepreneurs have sufficient reason to emphasise on utilisation of fund for the future growth and performance of their enterprise.

Loan service is playing a significant role in utilisation and formulation of capital formation in the MSME sector. This is utmost important for the government and public sector banks to ensure strong access of loan fund to enhance the growth of MSME sector.

There is a strong inter-chain relationship among the factors of utility of loan service, utilisation of fund, and capital formation. If the MSME sector is strongly supportive by financial assistance especially in terms of availability and accessibility of loan funds, MSMEs envisage a promising sector in the region under the study.