Banks rush to sign up SMEs

Returns of 8-10 per cent spur focus on the emerging sector

After agriculture, small and medium enterprises (SMEs) are high on banks' investment list. Attractive returns of around 8 per cent to 10 per cent has prompted banks to redesign schemes catering to SMEs.

It's a good proposition for banks as such loans help nullify the possibility of a default in priority sector lending, said a chairman of a leading public sector bank. State Bank of India (SBI), Union Bank of India, Canara Bank, HDFC Bank, UTI Bank, ICICI Bank are active players in this segment.

State Bank of India (SBI) on July 17 introduced a new scheme for financing broiler and agriculture products. As per the scheme, farmers can avail loans Rs 5 to Rs 25 lakh at 10.75 per cent. The bank provides five years including 6 months grace period for repayment.

Canara Bank has also launched a new scheme for the energy efficiency sector. Small enterprises, which consume large quantum of energy in their production process, are eligible to avail loan under this scheme.

However, the units would have to go through a energy audit and project reports specifying measures for energy efficiency should be presented to the bank.

Based on the viable report, the bank would extend term loans for implementing the projects at a rate of interest, which would be 1 per cent less than the normal rate and with a margin of 10 per cent against the normal 15 per cent to 25 per cent.

Foreign banks are equally strong in the SME arena, offering foreign currency credit lines at rates as low as Libor plus 75 basis points. This is as opposed to nationalised banks offering pre-shipment and post-shipment credit at about eight per cent.

Said Gurumani Suresh, heading business financial services at Standard Chartered Bank, a lot of small corporates access forex credit lines at significantly low rates of interest. "The idea is to understand and price the risk. As the key problem is that financials of SMEs do not tell the true story, it is imperative to see the personal wealth of individuals. Many a times they tend to leverage their business based on the personal wealth," said Suresh.

ICICI Bank, HDFC Bank and UTI Bank are active private players in this segment. HDFC Bank has two divisions "" retail business and emerging corporates ""which look into SME financing, said Samir Bhatia, country head, corporate banking, HDFC Bank.

The retail business banking division issues loan to small enterprises with a turnover of about Rs 10 crore. The average ticket size of the loan is around Rs 5 lakh.

The interest rate charged is usually 10 per cent to 12 per cent. The emerging corporate business division issues loans to medium scale enterprises with a turnover of about Rs 10 to Rs 200 crore.

UTI Bank introduced the power trade scheme for financing traders. The bank internally has a rating mechanism to assess loan applications, said R Asokkumar, president, credit, UTI Bank. The average ticket size of loans sanctioned under this scheme is around Rs 1 crore.

The bank has also undertaken cluster study to understand the needs of a specific sector and design products accordingly, he added. It has conducted cluster study on the water and pump industry in Coimbatore and hoisery in Ludhiana.