Mumbai: Tiny businesses may be offered an enlarged credit guarantee in the budget for 2009-10 as they seek to ride out the economic downturn.
The government is considering extending the scope of an existing credit guarantee fund to cover all bank loans given to micro, small and medium enterprises (MSMEs), which account for 40% of India’s exports and 17% of gross domestic product.
“There is a proposal from the Reserve Bank of India (RBI), and the ministry is working on it. The size of the corpus of such a fund is being worked out,” said a finance ministry official, who didn’t want to be identified. Such a move will be a boon for a sector that employs 40 million people through 1.28 million units. Tiny business units have been hard hit by a credit crunch and slump in demand as growth slowed in the face of a global recession.
The Credit Guarantee Trust for Micro and Small Enterprises was set up by the ministry of MSMEs and the Small Industries Development Bank of India in August 2000.
The corpus of the fund, as on 1 April 2006, was Rs1,189 crore and it was proposed to raise it to Rs2,500 crore over a period of five years.
According to RBI’s definition, a microenterprise is a business in which investment in plant and machinery does not exceed Rs25 lakh. A small enterprise has an investment of between Rs25 lakh and Rs5 crore and a medium enterprise has an investment that is more than Rs5 crore but does not exceed Rs10 crore.
The credit guarantee scheme, as it stands now, covers only those loans disbursed after it came into force. Loans secured by collateral are not covered. The proposed extension of the scheme’s scope “will help us to fall back on the government in case there is a default by small and micro enterprises, which have availed loans pledging collateral”, said a general manager with a large public sector bank who didn’t want to be named. “SMEs are not very forthcoming when you try to forfeit their collaterals,” he added. “That problem will be solved after this.”
The existing scheme offers guarantees against loan defaults. In other words, if a borrower is unable to repay a loan and it becomes a non-performing asset (NPA) on the books of banks, the government takes the responsibility of paying the loan by using money from the fund.
Such a scheme offers a cushion to tiny businesses, which wouldn’t face the risk of their loans in default being classified as NPAs, enabling them to access fresh bank loans. Banks, for their part, avoid having to set aside money to cover the risk of default on such loans.
The existing credit guarantee scheme covers 85% of loans of up to Rs5 lakh given to microenterprises. For loans up to Rs50 lakh, the coverage is 75%. The maximum coverage for a Rs1 crore loan is Rs62.50 lakh.
According to the finance ministry official cited earlier, the government proposes to broad-base the corpus to cover all outstanding small loans. “There will be a cut-off limit and the entire amount of loan will not be covered,” he said.
According to the latest data available with RBI, the total outstanding bank credit given to MSMEs as of March 2008 was Rs1.48 trillion. Data for fiscal 2009 are not yet available.
Still, expansion of the credit guarantee alone is not enough, said an industry representative. Banks must be more liberal in lending as the sector generates huge employment, said Sudarshan Sareen, president of All India Confederation of Small and Micro Industries Association, which has about 250 members.
“Banks discourage rather than encourage giving out loans, one reason why entrepreneurs have not been able to draw benefits from the credit guarantee scheme, which needs to be properly implemented,” Sareen said in New Delhi.
As of 31 March 2008, credit guarantees worth a total of Rs2,767 crore had been availed of by banks against 98,437 loan accounts, according to a committee on rehabilitation of ailing small and medium businesses, constituted by the Indian central bank in 2007.
The government’s move is largely in sync with the recommendations of the committee formed by RBI and headed by K.C. Chakrabarty, then chairman of Punjab National Bank.
The 2007 report of the panel pointed out that credit guarantee coverage had been obtained in only 10% the eligible accounts.
State Bank of India, the country’s largest lender, has restructured 14,300 accounts so far. The bank’s SMEs loan portfolio is about Rs1 trillion.
Banks’ stressed assets in SMEs segment are relatively low, less than 2% of their loan portfolio. This essentially means that the government may not have to spend too much even if it extends the credit guarantee to cover the entire outstanding portfolio.
Maitreyee Handique in New Delhi contributed to this story