Of RBI’s policy measures for credit

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: The RBI governor has just announced the mid-term review of monetary and credit policy. We would like to know if there is any implication for small industries. Importantly, small industry has not been able to get much-needed funding, even though it is covered under the priority sector. And with the move by all agencies to club medium enterprises with small ones, would this not mean a further squeeze in funds for the smaller SSIs?
—- Ashwini Mehandru, Greater Noida Industries Association

The mid-term review by RBI contains several important observations and guidelines for banks to increase the flow of funds to the small-scale sector.

The RBI governor has, for the first time, put on record his observation on the perception that there is under-pricing of credit for large corporates, while there could be overpricing of lending to the agriculture sector and to small and medium enterprises (SMEs).

He has questioned the current practice of fixing benchmark prime lending rates (BPLRs) and has indicated that a review of the current system is required to bring in transparent guidelines.

Second, RBI has provided banks with the flexibility to fix their own targets for financing the SME sector.

It has also asked banks to formulate liberal and comprehensive policies for extending loans to SMEs and to rationalise the cost of such loans. The cost of funds is to be linked to credit ratings.

Additionally, an internal working group, chaired by CS Murthy, set up to review the priority sector targets and sub-targets, has brought out a technical paper for wider circulation. This has been placed in the public domain and can be accessed at http://www.rbi.og.in.

Third, RBI has drafted a one-time settlement scheme for recovery of non-performing assets (NPAs) below Rs 10 crore for SME accounts. RBI has also formulated a debt restructuring mechanism for SMEs, in line with the prevailing corporate debt restructuring (CDR) mechanism in the banking sector.

Finally, it has now been clarified that units with investment in plant and machinery in excess of the small-scale industries (SSI) limit (Rs 1 crore in most cases) and up to Rs 10 crore, would be treated as Medium Enterprises (ME).

It has also been clarified that only SSI financing would be included in priority sector lending (not the financing to MEs). This should allay the fears of the smaller segment of SMEs—that entry of medium enterprises would squeeze fund flow earmarked for SSIs.