Banks asked not to raise EMis of SMEs

With rising interest rates and high inflation denting the bottom line of small businesses, the finance ministry has directed public sector banks not to increase the equated monthly instalments (EMIs) on loans to small and medium enterprises (SMEs), village industries and artisans.

In a recent letter to chairpersons and managing directors of state-run banks, the finance ministry said large companies had the option to go for corporate debt restructuring if they were not able to make timely repayment of their loans, but small industries and retail borrowers did not have any such choice. Along with borrowers of retail advances such as car and home loans, the ministry has asked the banks to adjust the loan tenure of artisans, village industries and SMEs instead of increasing their monthly EMIs.

“We will follow the instruction of the finance ministry,” said the chairman and managing director of a public sector bank. “Increase in EMIs may put more pressure on borrowers who do not have a high repaying capacity. Small businesses would be badly hit. This might result in an increase in bad loans.”

The Reserve Bank of India (RBI) has increased its policy rates 11 times in the last 16 months. At present, the repo rate, at which RBI lends to banks, is 8 per cent, against 4.75 per cent in March 2010. Consequently, banks have also increased their lending rates. The base rate of most banks, the floor rate or lending rates, is around 10 per cent now, compared to 7-8 per cent a year ago.

Bank credit to micro and small enterprises increased 11.8 per cent to Rs 2.3 lakh crore this June, compared to 2 lakh crore in the year-ago period. Credit to medium enterprises increased 31.7 per cent to Rs 1.8 lakh crore, whereas advances to large industries were up 22.7 per cent to Rs 12.4 lakh crore. Personal loans rose 17.3 per cent — to Rs 6.9 lakh crore in June this year. Headline inflation, as measured by the wholesale price index, has been above the 9 per cent since December 2010, and stood at 9.22 per cent in July 2011. Food inflation also increased to 9.8 per cent for the week ending this August 13.

The inflation is much above the comfort level of both the government and the central bank. The finance ministry expects it to moderate to around 6 per cent by March 2012.

However, in its recent quarterly review, the RBI had raised its overall inflation projection for March 2012 to 7 per cent from 6 per cent. The Prime Minister’s Economic Advisory Council has projected it to come down to 6.5 per cent by the end of the year.