Govt taps banks to ease credit flow to SMEs for manufacturing boost

Written by Sunny Verma | New Delhi | Updated: Sep 3 2012, 07:53am hrs
In order to boost the manufacturing sector, the finance ministry has decided to streamline and liberalise banks' lending norms for the small and medium enterprises (SME) sector. The new norms, which will be unveiled over the next few days, seek to spur credit flow to the SME sector. The department of financial services (DFS) has asked state-owned banks to come out with a uniform loan application form for SMEs for loans up to R25 lakh.

After a series of meetings with state-owned banks, the DFS has told them to adopt a liberal approach while sanctioning loans for new projects or new units coming up in the SME sector. The government has asked banks to set up an electronic loan tracking system, which would enable prospective borrowers in the SME sector to check the status of their loan applications. This will reduce the discretion available to bank officers in granting loans to SMEs.

Finance minister P Chidambaram, in a recent meeting with bank officials, had emphasised the importance of making credit available to SMEs, which contribute to nearly half of the countrys total exports. The DFS is directing banks to disburse loans in their entirety after sanctioning them. Banks would not be allowed to stop funding sanctioned loans midway, official sources said. The manufacturing sector grew only 0.2% in the April-June quarter, against 7.3% growth in the same quarter in 2011.

Accessing loans has never been easy for SMEs, with banks being very subjective in lending to them, said Anil Bhardwaj, secretary general, Federation of Indian Micro & Medium Enterprises. There are instances when one bank accepts the loan application of a company but another bank rejects it, he said.

They would never record and give acknowledgement for the loan application. This electronic tracking system would definitely help here, Bhardwaj said. Only 8.5% of total bank credit currently goes to SMEs.

Banks would now be required to respond to a loan application from an SME company within a stipulated time-frame of 30 days, the sources said. There already are time limits to respond to a loan application but these are never adhered to. It is easy for banks to escape as SMEs never have any written commitment from them.

The government is further nudging banks to open more branches in areas with a large presence of SMEs and in SME clusters, the sources said. Bhardwaj said there was a need for cheaper credit, especially in the housing sector, as SMEs cater to this sector in a large proportion.