Banks still wary of lending to small companies on risk perception

MUMBAI: The finance minister has instructed public sector banks to lend more to the medium, small and micro enterprises, or MSMEs, but, if the latest data released by Reserve Bank of India is anything to go by, that is not happening. Assessment of risk, lack of access and volatile cash flows of prospective borrowers are keeping banks away from lending to the sector.

The growth in credit for medium-sized firms has dropped to 1.1% as on October 21, from 30% as on October 21, 2011. For small and micro industry, the growth has dropped from 15% to 6%, RBI data shows.

Loans lent to micro and small enterprises have declined from 17.4% to 8.4% on a year-on-year basis, despite banks having to mandatorily lend a portion of loans under the priority sector lending targets, monthly data released by RBI for October shows. According to media reports, in November, Finance Minister P Chidambaram had asked public sector banks to hand-hold small and medium enterprises through the current slowdown in production and ease lending procedures. But structural issues are making banks wary of lending to the sector.

"There is stress in the industry and they (banks) have limited risk-bearing appetite," said SKV Srinivasan, executive director, IDBI Bank. "Disbursal is based on the level of activity, and the overall growth in turnover has declined."

It is not just a decline in the turnover of the sector that is the issue, tough lending norms have also stopped credit from flowing to such critical sectors.


"Lending norms that banks follow are not conducive for the sector," Rajesh Chakrabarti, assistant professor, finance, Indian School of Business, said. "For example, if one looks at the credit cycle, the 60-day period after which a loan becomes an NPA may work well for the large and stable companies, but not for small and medium enterprises."