Dalit-run firms starved of funds as banks fight shy of lending to medium sector

India’s small and medium-sized companies are struggling to meet their funding needs with risk-aversive commercial banks increasingly turning reluctant to fund these companies, fearing a rise in their bad loans.

Small firms are facing stress, despite the current norms laid out by the Reserve Bank of India (RBI) that require banks to mandatorily lend a specific chunk of their total loans to such companies.

In the last few years, bank funding to small firms has significantly shrunk. Total bank loan outstandings to medium-sized companies declined to Rs 1.25 lakh crore as at end-June from Rs 1.35 lakh crore in the corresponding period last year, shrinking by 5 percent on a year-on-year basis.

Bank lending to micro and smaller firms, on the other hand, has posted a 21 percent growth over the same period to Rs 3.5 lakh crore, but this is largely due to the fact that banks typically lend to the micro segment to fulfil their so-called priority sector lending (PSL) targets.

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Under this, banks need to lend 40 percent of their total loans to agriculture, exports, small business units and the economically weaker sections. Failure to meet this target will require banks to compulsorily invest in the rural infrastructure development fund (RIDF) maintained by the National Bank for Agriculture and Rural Development (Nabard) at a lower rate.

Bad loans vs low interest rates

But officials at medium-sized units allege that banks have been opting to invest in the RIDF rather than lend to medium-sized units fearing bad loans from such accounts, thus affecting the funding prospects of these firms. It also ensures that the principal amount is safe, said a bank official.

“Banks are hesitant to fund several medium-sized units despite the fact that these loans will qualify to be PSL. They would rather invest in the RIDF,” said Milind Kamble, president of Pune-based Dalit Indian Chamber of Commerce, an industry body for small and medium-sized firms run by Dalit entrepreneurs.

The chamber, set up in 2003, has about 3,000 member firms with turnover ranging from Rs 10 lakh to Rs 2,000 crore.

Besides the PSL, banks are also required to make available funds for small and medium companies under the Government-sponsored Credit Guarantee Fund Trust for Medium and Small Entrepreneurs (CGTMSE), under which banks lend collateral-free loans up to Rs 1 crore each.

But banks do not even comply with this norm, industry officials alleged. “All this looks nice on paper. Banks insist on collateral even for those loans, which are supposed to be collateral-free under the government scheme,” said Rajendra Gaikwad, who runs a pesticide firm in Sangli district of Maharashtra.

Gaikwad has approached several banks for the Rs 1 crore loan but he claims he has been not been given one `without collateral.'

The inability of start-up firms to offer assets as collateral to banks for securing loans has posed significant roadblocks to kick-start their fledgling business, industry officials said.

Fear of NPAs

Bankers, on the other hand, are worried about higher risks from loans given to small and medium sized companies. “A significant portion of the bad loans in the banking system in recent years has come from loans given to mid-sized companies. It is natural that banks are turning cautious to lend to this segment,” said a senior executive at a state-run bank.

“I agree that the micro, small and medium enterprises sector (MSME) needs more attention from banks but because of a higher percentage of unviable or sick units in this sector, there is a fear that the money lent would go towards becoming a non-performing asset (NPA),” says Jayanta Sinha, independent banking consultant and former chief general manager, State Bank of India.

“Though there is a 1 crore collateral free CGTMSE loan scheme, I know some banks do not give it to the vulnerable sections. There is a need to change the approach, attitude and skill levels of officers at the micro level,” he added.