Banks averse to subsidised SME lending

Commercial banks are up in arms against a proposal that seeks to direct them to extend a certain portion of their loans to small enterprises at subsidised rates of interest on the lines of farm credit.

The National Commission for Development of Enterprises in the Unorganised Sector has recommended that credit flow to small enterprises with plant and machinery up to Rs 5 lakh, should be increased to 4 per cent in the next two years and 8 per cent of the total bank credit by 2017. It is currently at 2 per cent. The commission had discussions with bankers under the aegis of the Indian Banks' Association (IBA) on their wish-list for increasing the flow of credit to the small enterprises. 

BANK CREDIT in Rs crore
	Food Credit	Non-food	Gross
05-Jan-07	43,083	17,14,396	17,57,479
19-Jan	41,210	17,25,281	17,66,491
02-Feb	43,503	17,52,612	17,96,115
16-Feb	43,999	17,69,326	18,13,325
02-Mar	44,900	18,01,413	18,46,403
16-Mar	45,838	18,21,118	18,66,956
30-Mar	46,521	18,38,462	18,76,672
13-Apr	46,354	18,22,901	19,06,128
27-Apr	48,887	18,38,671	18,89,557
11-May	47,404	18,43,657	18,91,061

The commission has also recommended that banks should extend loans to the smaller enterprises at 7 per cent and the government should grant a subvention of 2 per cent on the loan amount. According to it, around 97 per cent of the small scale enterprises are in the unorganised sector.

"We have opposed the commission's recommendation as banks cannot be subjected to directed lending in every segment. The banks follow the Reserve Bank of India's (RBI) priority sector guidelines,'' said a senior banker. The commission is yet to submit its report to the government.

The exposure by banks to small enterprises is considered as priority sector lending, but the RBI does not stipulate any sub-target for lending to these small businesses.

The commission is upset that net bank credit to the small scale industry has dipped to 6 per cent from an average of 12 per cent some years ago as banks have substantially increased their lending to housing and education sectors, which qualify for priority sector lending. The commission is demanding that banks should focus on ensuring credit flow to the small enterprises.