An inter-ministerial group has approved earmarking of 6% of net bank credit for micro enterprises under priority-sector lending to enhance the fund availability to the beleaguered sector. However, the proposal has to cross a few ?hurdles? before it could be implemented, micro, small and medium enterprises (MSME) secretary Dinesh Rai said on Wednesday.
The MSME ministry was earlier talking to the finance ministry and the Reserve Bank of India (RBI) for a separate priority-sector lending target of 15% for MSMEs. But even after deliberating on the issue for almost a year, it failed to convince the two entities and has now accepted the proposed 6% marking for the micro units only. Enterprises with investment of up to Rs 25 lakh are categorised as micro.
?Small and medium enterprises already get credit under the priority sector lending target. There was also a view that 15% target for MSMEs would lead to overcrowding within the priority sectors and banks may not be able to meet the requirement,? Rai told FE.
In a meeting last week, the inter-ministerial group decided on the 6% earmarking. ?We also feel the 6% target will help micro enterprises in getting the required bank funding,? Rai said. However, the decision is just the first step. ?It has to cross a few more hurdles like RBI and the finance ministry. Then only it could be implemented. For this, I will send the minutes of the last week?s meeting,? the secretary added.
The MSME ministry had proposed the 15% target for MSMEs last August, but the finance ministry and RBI did not agree on the same. In a report submitted to Prime Minister Manmohan Singh on April 30 this year, National Commission for Enterprises in the unorganised sector also recommended 12% lending target for MSMEs under priority sectors.
As per the present arrangement, domestic banks have to lend 40% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposures, whichever is higher, as on March 31 of the previous fiscal to agriculture, housing, MSMEs, etc. The norm for foreign banks is 32%.
After mid-September last year, credit supply slowed down. Up to March 27 of the previous fiscal, public sector banks? advance book expanded by 20.4% vis-?-vis 22.5% in the previous year. However, private sector banks and foreign banks recorded only 10.9% and 4% increase in credit offtake, respectively, against about 19.9% and 28.5% a year ago.
Loans to MSMEs, which MSMEs employ 42 million people and contribute 9% of country?s GDP and 40% of exports, rose 35.4% during the fiscal up to February 27, sharply lower in comparison to 67.4% in the corresponding period of the previous fiscal.
Rai also pitched for a better system of credit rating for MSMEs. ?The present system of credit ratings is yet to achieve its potential due to inadequate exposure of banks to MSMEs, higher cost of borrowing and higher risk perception. We have to marry the interest of banks, borrowers and investors to generate the expected results,? he said.
Under Basel II norms that were to be implemented not later than March 31, 2009, banks have to keep higher sum as reserve in case they lend to unrated entities. However, there is a duplication of rating, as banks rate the already-rated borrower to safeguard their funds.
?Under Basel II, we need to move toward advanced system of credit rating and hence cannot rely only on outside rating agencies, whose competitiveness is questionable. To ensure safety of our funds, we have to undertake internal rating of the borrower,? Punjab National Bank?s general manager (SME) Jagat Ram said.