SMEs prefer co-op banks

When N L Shah, an microscopy-based instrument manufacturer from Pune needed credit to expand his laboratory, he chose not the banks but the family kitty.

"My brothers sold their flats and gave me the money. Going to a bank would have meant mortgaging any future profit I could expect to make," he said.

Small and medium enterprises (SMEs) are today the most sought after by private sector and foreign banks. At the same time, wary of non-recoveries, many banks ensure a lien on the cash flows of SMEs.

These enterprises are able get access to bank credit where they are able to leverage on corporate relationships. HSBC for instance lends to small garment manufacturers who have a tie up with large international garment houses, which in turn are clients of HSBC overseas.

Shah claimed that though the small scale industry (SSI) segment is supposed to be treated on par with the agricultural sector according to government guidelines, the interest rates charged by the banks worked out to anywhere between 20 and 50 per cent.

"Nor are they supposed to charge a compounded rate of interest but invariably that is what happens," said Shah. Bankers, however, profess that the rate of interest varies anywhere between 8 to 11 per cent.

"Banks lend at low cost to third-party manufacturers (suppliers) on the basis of their order book position," said senior executives at Hindustan Lever Ltd (HLL). This is without the corporate entity offering any guarantee to the banks.

"Many SMEs don't show all their profit on the books, which makes their creditworthiness doubtful," said R Y Angle, former chairman of the Confederation of Indian Industry (CII) panel on SMEs. Whenever SMEs have gone to these banks with credit ratings from agencies like Crisil, banks' response has been better, he added.

Most banks offer credit and other services to SMEs only on the basis of these small manufacturers keeping a 'float' amount of Rs 1 lakh.

"Lending to SMEs is incidental when banks offer a whole gamut of products including cash management products and export-related services," said a senior executive of a leading foreign bank, which aims to enhance its presence in the SME space.

Most SMEs look for loans in the range of Rs 20-30 lakh. "This is a very small amount for foreign banks. Their cost of servicing loans, whatever the size, is the same. Hence their preference for clients who can absorb bigger credit lines," said Mukund Bhogle, managing director, Duraware Pvt Ltd, makers of Nirlep brand of non-stick kitchenware.

Private sector banks are equally in the chase expanding their presence in the country. IDBI Bank for instance, recently announced its plans to enhance its branches at over 25 new locations.

IndusInd Bank through the merger with Ashok Leyland Finance, intends to tap more SME accounts, capitalising on Ashok Leyland's presence in tier two and tier three cities.

Cooperative banks are feeling the heat from their peers in the private and foreign banking sector.

"These banks have started eating into our business as they try to lure SMEs with tailored products and cheaper funding," said a Shamrao Vithal Cooperative Bank official. Till recently, SMEs were mostly serviced by co-operative banks, moneylenders and small finance companies.

Yet SMEs continue doing business with cooperative banks. One key reason being the paperwork involved.

"Most SMEs are one-man shows and the same person has to manage the Maharashtra State Electricity Board, excise and factory inspectors, not to mention the sales tax and octroi issues. Since co-operative banks do not ask for so much paperwork, SMEs tend to go there," said S J Mahshabde, chairman of IEC Air Tools.