Cheap credit likely for small firms

The government is considering lowering interest rates for small scale and tiny industries as part of a financial package for the sector ahead of the forthcoming general elections.

The ministry of small scale industry has proposed that the interest rate on all loans to small scale units be lowered to the prime lending rates of nationalised banks and a further 2 per cent discount for tiny industries.

The proposal has been sent to the Prime Minister's Office. Government sources told Business Standard the small scale industry ministry was also pushing for a comprehensive law for the sector.

The sources said the ministry had held parleys with the finance ministry and some bank chiefs. A meeting had been convened by Small Scale Industry Minister CP Thakur in December to discuss the issue of credit flow to the sector.

Though the minister was pushing for a sub-limit for lending to small scale industry within the priority sector norms, the proposal was turned down by NS Sisodia, secretary, financial sector division, finance ministry. The finance ministry also turned down a proposal for more tax concessions.

The move is being seen as an attempt to garner support from the sector, which generates nearly 40 per cent of the jobs in the manufacturing sector.

Officials, however, said the cost of credit was a problem. While the average cost of funds was estimated at 7-8 per cent, the small scale sector is borrowing at around 14 per cent.

"Ideally, the risk element and the management cost should not exceed 3-3.5 per cent and credit should be available at 11-12 per cent," an official said.