'Banks should lend to SMEs with caution'

The Reserve Bank of India (RBI) has asked banks to develop effective risk management controls for lending to small scale enterprises (SME).

The regulator said lending to the SME sector was extremely crucial for economic growth, but a policy change is required to facilitate lending so that the risk is minimised.

“Banks lending to SMEs will have to take the risk into account. They should balance expansion of credit to SMEs with increase in risk,” said Subir Gokarn, deputy governor, RBI, during a SME summit. The central bank is of the view that the risk increases as banks move down the hierarchy and hence there was a need of an effective risk mitigation system in place.

The deputy governor also urged for actions that would make the small scale enterprises commercially viable and more competitive. Banks have been actively lending to small scale enterprises. According to RBI data, total deployment of gross bank credit by the micro and small sector as on June 17, was Rs 2,334 crore, against Rs 2,291 crore on March 25.

Although, lending to the SME sector has been on a rise, the high non-performing assets have been a cause for concern.

According to a report by the Boston Consultancy Group (BCG), the NPAs in the MSME sector were to an extent of 4.24 per cent as of March, 2011.