Rate Cut Brings Little Cheer To Small Sector

Last weeks reduction in the bank rate announced by the Reserve Bank of India (RBI) by 100 basis points has brought little cheer to the small and medium enterprises as they feel that the move is unlikely to bring down the cost of funds for them.

Contributing approximately 40 per cent to the turnover of the manufacturing segment and accounting for 35 per cent of exports, the small and medium sector pays around 21 per cent interest on bank loans.

The banks are not inclined to lend to the small-scale sector. That is why they sanction loans to small and medium units at a higher price, an analyst said.

 

Harish Joshi, vice-president of Singhal Cement & Allied Industry, a Rajasthan-based Rs 7 crore company said: Banks are just not willing to give loans to the small-scale sector and prefer lending to the big industrial groups. We are like beggars and have to literally plead with the banks for loans...and since we do not have the influence that the big groups wield, we are forced to accept the terms and conditions they set for us.

Mukesh Gupta, promoter of Delhi-based Whale group of companies with interest in paper and stationery, said while Central Bank of India and Canara Bank charge 20.5 per cent and 19.5 per cent, respectively, the Bank of Punjab has lent to the group at 21.5 per cent.

Changing bankers is a cumbersome process. But, there is no real advantage even if one switches banks as no bank would dilute the terms for loan prescribed by another bank. So practically, a banking cartel is operating, Gupta said.

A one per cent cut in bank rate will hardly make a difference to us, says Sukhdev Singh of SweetChem Antibiotics. He says the benefit of such a rate cut will never trickle down to the small sector. This is because we do not have a fair market controlled system...it is an unfair system, he said.

But according to Federation of Small and Medium Enterprises (FISME) president Dinesh Singhal, there is still hope. The bigger companies now have access to cheaper funds abroad and are increasingly looking in that direction. So, when they stop borrowing from the domestic banks, who will the banks lend their money to? They will have to come to us. And that is bound to happen, Singhal said.