New Delhi: When Gurinder Singh, who runs a factory that makes small steel parts for farm tractors and cranes, applied to state-run Indian Overseas Bank (IOB) last month for a Rs20 lakh overdraft to import new machinery, he was turned down for the first time.
Under pressure: A wooden toys factory in New Delhi. The credit squeeze is cutting across all sectors of the economy and small firms, mainly family-run entities or joint proprietorships, are reeling under a funding crunch as banks hold back loans for fear of default. Ramesh Pathania / Mint
“We usually enjoy overdrafts of between Rs15 and Rs20 lakh during the festival season. It has been cut to zero this year,” says the 37-year-old entrepreneur, who had to borrow from friends to even pay the 80-odd employees of his Faridabad, Haryana-based firm, KP Tools Ltd, their annual Diwali bonus.
Singh’s Rs6 crore unit and other small companies, mainly family-run entities or joint pr-oprietorships, are reeling under a credit crunch as banks hold back loans for fear of default.
The credit squeeze cuts across all sectors of the economy, but small and medium enterprises (SMEs) that lack the deep pockets, endurance power, credit worthiness and alternative funding sources of big business, have been hardest hit by banks’ reluctance to lend and the high cost of money.
SMEs account for nearly half of manufacturing output and 40% of exports
SMEs account for nearly half of India’s manufacturing output and 40% of its exports. The sector provides livelihood to 45 million employees, according to data from the ministry of micro, small and medium enterprises.
“The first sector to be hit when there is a credit problem is the small and medium sector,” says a spokesperson for the Confederation of Indian Industry (CII).
The industry lobby has asked the Reserve Bank of India (RBI) to reduce risk weights for SMEs that would help them access bank credit more easily and suggested that the central bank and the government create a corpus to lend them money at rates charged on loans to banks’ best borrowers, says the CII spokesperson.
Banks downplay the credit squeeze, which RBI has been trying to loosen by reducing the amount of money lenders have to keep in reserve.
In Faridabad, for instance, there are 37 banks operating. IOB’s Faridabad branch manager Sunil Kumar Bhatnagar says, “Customer requirements are catered to within the norms. It’s actually the market sentiment which is being echoed by the public.”
The lead bank for the area is Syndicate Bank. The lender’s lead district manager Narayan Singh Vimal says, “There is plenty of liquidity and banks are lending.” About 18% of total advances are channelled to SMEs, he adds.
In its latest move to loosen credit, RBI had on 1 November cut the proportion of deposits lenders must keep with the central bank to 5.5% from 6.5%. It had also reduced the amount banks are required to invest in government bonds by one percentage point to 24% and pared its policy rate to 7.5% from 8%.