RBI asks banks to enhance credit flow to SMEs

The Reserve Bank of India (RBI) has asked banks to improve credit flow to the fund-starved Small and Medium Enterprises (SME) in the country, which has declined sharply in the last decade.     

"Banking institutions need to improve their credit assessment capabilities to improve the flow of credit to SMEs. It is necessary to scientifically assess the small-scale enterprises and not to equate SSIs with high risk," the Reserve Bank said in its Currency and Finance report.     

The share of SME credits in total non-food bank credit declined almost consistently from 15.1 per cent in 1990-91 to 6.5 per cent in 2006-07.     

Similarly, the SME credits in total priority sector advances declined sharply to 17.9 per cent at end-March 2006 as compared to 43.6 per cent at end March 1998, the report said.     

RBI said a steep decline in SME-credits was largely owing to increased loan flow to the retail and corporate sectors over the past years.     

"This suggests that it is the large corporates that have increased their dependence on the banking sector...The major development that has taken place over the last decade is the diversification of credit in India towards retail credit," it said.     

The share of retail credit comprising housing loans, personal loans, credit cards and consumer durable loans rose to 22.3 per cent of the total credits in the system in 2007 as against 6.4 per cent in 1990, RBI said in the report.