RBI asks banks to up credit flow to SMEs

RBI asks banks to up credit flow to SMEs
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First Published: Sun, Sep 14 2008. 04 09 PM IST
Updated: Sun, Sep 14 2008. 04 09 PM IST
Mumbai: The Reserve Bank of India (RBI) has asked banks to improve credit flow to the fund-starved Small and Medium Enterprises (SME) in the country, which has declined sharply in the last decade.
“Banking institutions need to improve their credit assessment capabilities to improve the flow of credit to SMEs. It is necessary to scientifically assess the small-scale enterprises and not to equate SSIs with high risk,” the Reserve Bank said in its Currency and Finance report.
The share of SME credits in total non-food bank credit declined almost consistently from 15.1% in 1990-91 to 6.5% in 2006-07.
Similarly, the SME credits in total priority sector advances declined sharply to 17.9 % at end-March 2006 as compared to 43.6% at end March 1998, the report said.
RBI said a steep decline in SME-credits was largely owing to increased loan flow to the retail and corporate sectors over the past years.
“This suggests that it is the large corporates that have increased their dependence on the banking sector. The major development that has taken place over the last decade is the diversification of credit in India towards retail credit,” it said.
Retail credit
The share of retail credit comprising housing loans, personal loans, credit cards and consumer durable loans rose to 22.3% of the total credits in the system in 2007 as against 6.4% in 1990, RBI said in the report.
Notwithstanding a pick-up in SME credit growth to the agriculture and SME sectors in recent years, there is a need for more concentrated efforts to increase the flow of credit to these sectors given their significance in the economy, the apex bank said.
“On the whole, agriculture, large corporates and retail sector benefitted from credit expansion, while credit growth to the SME sector remained tepid until recently,” it noted.
“Besides, given the rising exposure to infrastructure, banks need to guard against asset-liability mismatches and should consider transferring the risk from the balance sheets of banks to other players in the financial system,” RBI said in the report.
“Also, the industry need to gradually reduce their credit-dependence on the banking sector to meet the requirements of fund-starved sectors like agriculture and SME,” the central bank said in that report.
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First Published: Sun, Sep 14 2008. 04 09 PM IST
More Topics: RBI | Credit | SME | Retail Sector | Housing Loans |