NPAs stymie credit to SMEs

Banks find high level of non-performing assets (NPAs) a deterrent in following the government's diktat to increase lending to small and medium enterprises (SMEs).

The overall net bank credit has grown by 16.31 per cent to 28.35 per cent during 2001-2005, but the rate of growth in advances to SMEs grew much lower at 16.05 per cent from 5.12 per cent.

High NPA levels are affecting higher flow of credit to the sector. NPAs in the sector range between 16.4 per cent to 19.5 per cent and there is also a growing incidence of sickness. Nearly 1.3 lakh units with total loans outstanding of Rs 5,380.13 crore have fallen into the sick category.

According to a RBI note circulated to banks, some of the other reasons for slow credit growth in the SME sector are inadequate infrastructure facilities, delay in getting clearances from different agencies and economic and political environment.

Early this week, RBI held discussions with public sector banks, financial institutions and representatives of industry associations.

It decided to conduct further studies for tackling problems faced by small units in accessing credit.

The government has set a target of 30 per cent year-on-year growth in credit flow to the SME sector. Its expects credit to double from Rs 67,000 crore in 2004-05 to Rs 1,35,000 crore by 2009-10.

Though credit flow to SME sector is mainly through the public sector banks, private sector banks like ICICI Bank and UTI Bank and some foreign banks are now becoming active.

The private and foreign banks see better interest margins in advances to SME units compared to the highly competitive corporate lending segment.