India?s banking sector is looking at increasing its exposure to the micro, small and medium enterprises (MSMEs) to support the success stories emerging from this sector and widen its portfolio. A clutch of state-owned banks is already lending more than what is mandated under the priority-sector target of earmarking 12.5% of their loan portfolio for the sector.

Banks such as State Bank of Hyderabad (SBH), United Bank, Indian Overseas Bank and the Small Industries Development Bank of India (SIDBI) have already increased their loan portfolio for MSME sector. With the the economic slump in the US and EU likely to affect exports, the mainstay for a sizeable section of MSMEs, the banks are now re-assessing tehir strategy, though.

In the context of the global economic crisis, the RBI has recently asked banks to take a cautious approach in lending to MSME units, as these are more vulnerable to the global crisis than larger firms.

SBH with advances of R11,390 crore to this MSME sector, plans to increase it to R14,284 crore by this year-end, taking it up from 17.36% to 22% of its lending portfolio. Similarly, SIDBI, which has an outstanding portfolio of R46,000 crore in this sector is aiming at 20% growth this year.

??Lending to this sector has been growing at 34-35%, higher than any other sector including retail and agriculture. This year we expect the growth to be even more,? S Venkataraman, general manager (MSME and technical), State Bank of Hyderabad said.

??For Indian Overseas Bank, the growth in advances to the MSME sector has been higher. According to its chairman and managing director (CMD) M Narendra, currently, the bank has outstanding loan portfolio of around R14,000 crore to the sector. Narendra said this is likely to go up. ?It is a good sector to give credit to even as the interest rates are restricted to some extent. One can sell other products in the form of saving schemes, insurance as well,?? he said.

As per the government norms, it is mandatory for banks to have atleast 12.5% of their loan portfolio in this sector. The interest rates for this sector go up to 14% depending on the bank and risk factor of a project.

??The bankers are willing to offer more than that. United Bank has a MSME loan portfolio of R7,700 crore ? around 14% of its total loan book. According to a senior official, the numbers will go up. ?We are keen to lend to this sector not because it is mandatory, but because it is profitable too. In 2010-11, there was a 27% growth in the lending to this sector. It is certainly going to be more than that,? he said.

The bank also has an cap on its interest rates for this sector. ?It is an internal decision such as 600 basis points over the base rate. This varies for different risk categories,? Bhaskar Sen, CMD, United Bank said.

The RBI deputy governor Subir Gokarn had recently cautioned banks on lending to SMEs asking them to develop effective risk management controls for this industry.

?MSMEs are sensitive to economic scenario because they are small in size. Especially the ones that are into exports. The global markets have weaken and therefore, the demands for these units have come down. However, our NPAs (non performing assets) are below 0.3%, which is encouraging enough to lend to this sector,? N K Maini, deputy managing director, SIDBI said.

At present, MSMEs account for 8% of the GDP and 40% of total exports. There are over 2.6 crore units with around 6 crore people working in it.