Old private banks give SMEs a taste of desi lending

Some old private banks seem to have taken a leaf out of moneylenders' books by financing small and medium enterprises (SMEs) at astronomical rates of over 45 per cent.

This is happening at a time when the government is pushing commercial banks to double their exposure to the sector.

According to R Ravimohan, CEO and managing director of rating Crisil, a south-based small trading house, part of the textile value chain, used to pay Rs 50,000 interest a month for a loan of Rs 5 lakh taken from a money lender under a system called hundi.

The effective interest rate, at this system, worked out to 10 per cent per month or 120 per cent per annum.

Now, the trading house borrows from a private sector bank. Instead of Rs 50,000, the textile trader now pays about Rs 20,000 per month as interest on the same amount. But the interest rate works out to 4 per cent per month or 48 per cent per annum.

This is not an isolated instance. Some old private banks in south have aggressively been following the practice of private money lenders where the interest is deducted upfront from the principal loan amount at the time of disbursement of the loan.

The level of interest rate does not pinch the SME sector as the loan enables the outfits to treble the turnover and make higher profits.

A private bank, which lends to small enterprises at such high rates, defended its action saying that they add value to borrowers by helping them substantially save on interest cost compared with money lenders.

Public sector banks have been asked to double flow of credit to SMEs from Rs 67,600 crore in FY 2004-05 to Rs 1,35,000 crore by FY 2009-10.

The policy announcement by the Centre and the Reserve Bank of India on SMEs cover definition of medium enterprises, encouragement of transparent rating system, increase in flow of credit to SMEs, extension of corporate debt restructuring and introduction of one-time settlement schemes to SMEs.