SME portfolios to qualify for priority sector lending

Existing SME portfolios would qualify for priority sector lending, and help many banks meet the stipulated targets, said HN Sinor, chief executive, Indian Banks' Association (IBA).

Sinor said as the economy was picking up, there was huge potential for SMEs to grow. This move would encourage bank funding rather than restrict lending towards this sector.

Indian banks had to meet priority sector lending targets at 40 per cent of advances, against 32 per cent for foreign banks, and it was SMEs and not SSIs which were contributing over 30 per cent towards employment, added Sinor. SMEs contribute as much as 30 per cent to the gross domestic product (GDP).

World over, governments have devised various policies to meet the requirements of SMEs.

In the US, SMEs account for 50 per cent of the GDP. Similarly, in Hong Kong and Singapore, SMEs contribution to GDP accounts for 21 per cent as per a study undertaken by McKinsey & Company.

Bank lending to this segment is expected to rise significantly at even finer interest rates. "Today, lending to SMEs takes place at very fine rates, especially, when they are able to leverage relationships with large corporates. With SME lending falling under priority sector lending, this will result in even finer pricing of these loans," said GV Nageshwara Rao, CEO IDBI Commercial Banking SBU.

Banks across the board "" public, private and foreign "" have been attracting SME clients with a plethora of free services. Many private sector and foreign banks have even set up branches in tier II and tier III towns to cater to this new clientele.

"This priority sector status will be a win-win situation for both banks and SMEs, offering the latter lower interest rates," said a senior Standard Chartered Bank official.

Leading foreign banks today lend to all kinds of SMEs. This include not just those into manufacturing, but even retail outlets, where the turnover is less than Rs 100 crore.

YES Bank had recently tied up with Small Industries' Development Bank of India (SIDBI) for a strategic alliance to provide financial services to SMEs.

"Today's policy announcement fits in well with our strategy. Enhanced credits to SMEs will greatly help banks achieve priority sector lending targets, and resultant pricing benefits getting passed on to SMEs," said H Srikrishnan, executive director YES Bank.

Commenting on bank funding to SSI units, Sinor said this had not picked up because of the 18 to 20 per cent delinquency. The previous government had earlier raised the investment limit for SSI from the current Rs 1 crore to Rs 3 crore.

Political pressure forced the National Democratic Alliance government to reduce the investment level back to Rs 1 crore.

Power factor

SMEs contribute over 30% towards employment and as much to the GDP

In the US, SMEs account for 50% of the GDP

In Hong Kong and Singapore, the contribution to GDP accounts for 21%

Bank lending to this segment expected to rise significantly at even finer interest rates