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India's small businesses find credit in short supply after mega-fraud


By and Neha Dasgupta

MUMBAI/NEW DELHI (Reuters) - When a $2 billion dollar fraud at state-run rocked two months ago, Chetan and other small business owners could have been forgiven for thinking "what's that got to do with me?"

Confident of his good credit record and long relationship with his bank, Hemani, who is a and exporter, had thought getting approval for a 25 percent above his 10,000,000 rupee ($153,330) credit limit would be little more than a formality.

But when Canara Bank, another state-run lender, turned down his request in March, says he gleaned from conversations with officers that he was a collateral casualty in the fallout from India's biggest scandal.

"It is suffocating," said. "When influential people defraud a big like and run away, there is nothing they can do. All they do is to squeeze "

The banks' increased rigour risks throttling one of the most vibrant parts of India's - the micro, small and medium enterprises (MSME) sector that has been growing at 10 percent annually for several years, according to government figures.

It is also a segment that contributes almost 38 percent of India's gross domestic product, employs some 100 million people, and accounts for 45 percent of India's and 40 percent of its exports.

Two years ago, these vulnerable businesses were stung by Narendra Modi's decision, with no forewarning, to take out of circulation overnight in a bid to flush out tax evaders. []

They were hit again last year by the chaotic implementation of a nationwide goods and services tax (GST), aimed at replacing various taxes and duties levied by different states.

said it had not changed policy as a result of the fraud.

"We were quite careful in sectional advances, quite cautious earlier also (in extending loans)... as such no effect" on extended to small businesses, said

But data for the sector as a whole does suggest there has been a tightening of credit.

disclosed in mid-February it had been the victim of a massive fraud.

For the February to March period lending to small businesses has fallen by 0.2 percent, though overall lending in the grew 5.9 percent. Lending to small businesses in the same period a year ago grew 5.8 percent.

At least three managers at branches focused on lending to small businesses all said that they have become much more stringent in disbursing after the PNB scandal.

"Everybody is cautious. We are following the exact rule book so that there's no deviation," said a of a who did not wish to be named.

"After the PNB scam, vigilance levels are very high and bankers are scared. I had overlooked some rules earlier just to help a business in distress. I cannot do it now," he said.


Bankers, however, also cited other reasons why small businesses were being hit.

In February, the tightened rules in a bid to identify and deal with stressed quickly.

Bankers said this meant reporting and classifying loans as low as 50 million rupees ($744,213) as potential defaults within 30 days of a missed payment, largely impacting small businesses. Bankers also cited the discontinuation of buyers' credit, or letters of undertaking (LoUs), for importers after the PNB fraud. The form of trade finance, once widely used by small businesses, was allegedly misused to perpetrate the PNB fraud, prompting a regulatory crackdown.

The PNB fraud has had a direct impact on trade finance, said, Rupa Rege Nisture, of L&T Finance, adding this hurts small businesses involved in labour intensive industries.

The LoU ban has forced many small businesses to seek short-term credit instead, according to another manager of a state-run bank's small business branch, noting these need more approvals and come with higher interest rates.


Several other small business owners told they too had struggled to get credit, with banks more wary of taking loan decisions based on past relationships with customers since the PNB fraud.

Inder Preet Anand, who owns a workshop and employs six people assembling strobe lights at a industrial estate, told she was rejected by her bank for an of 13,000 Indian rupees ($192.94) in February.

"I cannot give loans on relationships, we need to be strict or else after a few years I might be arrested," a said on condition of anonymity.

He said there was "a lot of pressure" from offices to follow rules to the letter.

After the $2 billion fraud at the country's second biggest state lender, several bank officials were arrested by India's federal police. A first set of formal charges against 22 people, including a dozen bankers, was filed in the case on Monday.

All this had led to fear among bank employees, say several bankers.

"Bankers fear taking commercial decisions that may later on be scrutinized through a law enforcement lens," said the of one state-run bank, who also asked not to be named.

He also noted that, unlike sizeable syndicated loans to major companies that are approved by a committee of bankers, loans to the MSME segment often only need approval from a branch manager, putting much more scrutiny on an individual if things sour.

(Reporting by in and in New Delhi; Additional reporting by in and Vishal Sridhar in Bangalore; Editing by and Alex Richardson)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, May 16 2018. 13:35 IST