SMEs' bank credit set to be doubled

Nationalised banks told to double credit flow to SMEs by FY10.

A package for doubling credit flow to small and medium enterprises (SMEs) over the next five years was announced by the government on Wednesday. The package also introduces a loan-restructuring scheme with a potential for restructuring debts up to Rs 10,000 crore.

For purposes of credit, SMEs will be defined as those with investments of up to Rs 10 crore in plants and machinery. Services and trading activities would also be covered by the package.

As per the package tabled in Parliament by Finance Minister P Chidambaram yesterday, nationalised banks have been instructed to increase credit flow to the small-scale sector by at least 20 per cent annually and double it from Rs 67,634 crore at the end of 2004-05 to Rs 1,35,000 crore by 2009-10.

The finance ministry has directed banks to step up disbursement of loans to the SME sector, including collateral-free and composite loans as per the Reserve Bank of India norms. The banks have also been asked to set up separate branches and depute specialised personnel to deal with SMEs.

The package includes a one-time settlement (OTS) scheme for defaulting units with March 31, 2004, as the cut-off date for accounts that turned into non-performing assets.

Vinod Rai, additional secretary in the finance ministry said, nearly 17 per cent of the loans, amounting Rs 58,274 crore, were in the bad and doubtful category at the end of March 2004.

This means that banks may take a hit on an exposure of Rs 10,000 crore to the sector as part of the OTS, which will be in force till March, 2006.

Banks have also been instructed to include SMEs in the corporate debt restructuring scheme. This means that sticky assets, which are potentially viable, will be restructured if 75 per cent of secured creditors agree to the restructuring.

With a view to facilitate cheaper credit flow, the finance ministry has asked banks to make use of the rating mechanism. While a rating platform has already been put in place by the National Small Industries Corporation, a Credit Appraisal and Rating Tool (CART), to be set up by a clutch of banks, would be functional from the next month, Rai said.

Small Industries Development Bank of India, Punjab National Bank and Bank of Baroda are expected to partner rating agency Dun & Bradstreet in setting up the system. Officials said Crisil and ICRA had also been sounded out on the proposal.

The government also asked banks to adopt a "cluster-based approach" to fund SMEs in the 388 clusters across the country. Sidbi will also come out with a funding scheme for public-private partnership to develop infrastructure in the clusters.

The ministry has also proposed a reduction in the guarantee fee charged by the Credit Guarantee Fund Trust for Small Industries (CGTSI), from 2.5 per cent to 1.5 per cent for all loans up to Rs 2 lakh. The reduction is also being sought for women entrepreneurs and those located in the northeast and Jammu and Kashmir.

Banks have been asked to absorb the annual service fee in excess of 0.25 per cent for the same category of borrowers.

The finance ministry has also instructed the boards of the banks to review the progress in the rehabilitation and restructuring of SME accounts on a quarterly basis.

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RISING TIDE

LOAN-RECAST scheme for restructuring debts up to Rs 10,000 crore

SERVICES AND trading activities also to be covered by the package

NATIONALISED BANKS told to raise credit flow to the sector by at least 20% every year

BANKS told to set up separate branches and depute specialised personnel for SMEs