Revised credit norms to give SMEs a boost

The modification of priority sector lending norms by the Reserve Bank of India to bring small and medium enterprises (SMEs) and export units under the 'priority sector' is expected to open new avenues for SMEs.

S C Ralhan, a Ludhiana exporter and president of the Federation of Indian Exports Organisations, said that the RBI move, together with the recent increase in the upper limit for investment in plant and machinery for medium-sized enterprises, will ensure that credit flows to all manufacturers with investment in plant and machinery of up to Rs 10 crore now.

Medium-sized units were not included in priority sector lending earlier. The definition of medium-sized units has also been revised from investment in plant and machinery of Rs 5 crore or less, to Rs 10 crore or less, and this will help more firms to seek credit under the priority sector norms.

Ralhan said that while medium enterprises will be covered under the general norm, for exports, credit of up to 32 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure, whichever is higher, will be eligible as part of the priority sector for foreign banks with fewer than 20 branches.

For other banks, including Indian banks, the incremental export credit over the corresponding date of the preceding year will be reckoned up to two per cent of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher.

Banks have started disseminating information on the new lending norms, said R S Sachdeva, co-chairman, Punjab, PHD Chamber of Commerce and Industry.

A relaxation on collateral requirements should also be introduced, as many SMEs cannot access loans due to inadequate collateral available to them, Sachdeva said.

Ralhan added that while RBI has taken a step forward by including export credit in the priority sector for domestic banks, restricting the facility to a sanctioned limit of Rs 25 crore per borrower to units having a turnover of up to Rs 100 crore would limit it to only a third of exporting units.

The share of exports as a percentage of net bank credit, which was as low as 3.8 per cent in March 2014, may increase marginally, but it will be much below the desired target of 12 per cent fixed by RBI, he said.

The cost of credit to SMEs in most developing countries is five to seven per cent, but in India it is 12-12.5 per cent, excluding the interest subvention, Ralhan said. The slump in international demand has also meant that the payment period for exporters has increased from three to six months earlier, to six to nine months now. This has added to the cost, he added.