RBI pushes SHG model for lending to small units

RBI Deputy Governor Usha Thorat pointed out that many banks were not following the norms on collateral security while lending to the small and micro enterprises.

Though guidelines exempt banks from taking any form of collateral for group loans up to Rs 5 lakh, banks seek some form of security from these units. She, however, did not elaborate on the RBI stance on this matter.

Though the lending to SMEs has grown substantially in the recent past, it is not commensurate with their share in the economy.

Banks could use the group collateral approach along with SHG model and micro finance institutions, both of which have helped in improving financial inclusion, for micro and small units, Thorat said while addressing the Indian Banks' Association's meet on Leverage lending to MSMEs.

The collateral and group lending approaches are expected to bring about peer pressure for the prompt repayment of loans, leading to low incidence of defaults, bankers said.

Thorat also made out a case for credit guarantees trusts to charge premium to banks based on the risk of their SME portfolios. A flat fee is currently levied for assuring repayment in case of defaults by the SME units. The guarantee scheme has the potential to bring new borrowers into the SME segment, she said.

Banks should price the credit to SMEs according to risk assessment, using the trends and signals thrown up by the core banking software. Besides helping in pricing loans, the information could provide advance warning on difficulties faced by the units and thereby enable the banks to take proactive steps, she added.