Mid-sized firms bear brunt of fund crunch

Mumbai: Mid-sized firms, which bore the brunt of poor growth in a sluggish economy, received practically no financial support from banks in the last two years till April.

In the 12 months to April, bank lending to these firms grew a mere 0.3% from a year ago, reveals an analysis of latest data from the Reserve Bank of India (RBI). The data—available till 18 April—showed that the loan outstanding to these companies remained stagnant at around ₹ 1.25 trillion, almost similar to the figure recorded a year ago.

The reasons, say bankers and industry officials, vary from bad loan worries, prolonged business slowdown and the inability of promoters to bring in equity contribution to raise bank debt.

They add that repairing the health of ailing industries, one of the major focus areas of the newly-elected Narendra Modi-led National Democratic Alliance (NDA) government, won’t be an easy task unless it can persuade bankers to resume lending to medium-sized companies, which have been struggling for bank finance.

Banks significantly reduced lending to small and medium sized enterprises (SMEs) given that a sizeable chunk of the non-performing assets (NPAs) in the banking sector has emerged from this category.

However, the growth in bank funding picked up significantly in segments like non-banking finance companies (NBFCs), agriculture and commercial real estate over the year. Bank loans to NBFCs grew 19.3% in the 12 months ended April against 3.9% a year ago, while lending to commercial real estate rose 19.8% compared with 11.5% in the same period last year.

“No one wants to take a hit by lending to companies which do not pay back,” said the official of a large state-run bank. Not wishing to be named, the official added, “But there is no blanket ban on them. When things improve, banks will resume lending.”

While the pace of loan growth to micro and small companies and large firms, too, has declined in a slowing economy, that towards the infrastructure sector almost halved in the 12 months ending April, RBI data show.

There are around 15 million registered medium-sized companies in India, around 20 million small companies, and about 5 million micro- and tiny enterprises, according to the SME Chamber of India, an industry lobby of small companies.

Under current laws, companies with an investment of up to ₹ 10 crore in plant and machinery are categorized as medium-sized companies, those up to ₹ 5 crore as small companies, and below that as tiny.

“Things have turned bad for mid-sized companies especially in the last two years, since they do not have enough funding avenues,” said Hatim Broachwala, senior research analyst, Karvy Stock Broking Ltd. “It is unlikely that funding will pick up immediately, since a revival should first happen for larger firms.”

While lack of demand, weak equity base and high risk are cited as reasons for bankers for not lending to small and medium sized companies, industry officials say banks are reluctant to give money to them as the segment is not a lucrative business.

“Till a company attains the size of medium-sized firm, banks offer money. But once it reaches that levels they stop lending,” said Chandrakant Salunkhe, president of SME Chamber of India. “Banks are okay to give growth capital to small firms but not the expansion capital. For that, they are asking us to go to private equities. Unless there are sufficient funding avenues to support medium-size companies, chances of an industry revival is difficult even if the economy recovers,” said Salunkhe.

Typically, banks lend to smaller firms because that helps them to meet the so-called priority sector lending targets. Under current norms, banks have to lend 40% of their deposits to agriculture, exports, micro and small units and other economically weaker sections under priority sector obligations.

“Promoters of mid-sized companies are unable to generate equity to raise debt capital. There is no sufficient mechanism that helps medium-sized firms to raise equity in India,” said Sushil Muhnot, chairman and managing director of Bank of Maharashtra and former chairman of Small Industries Development Bank of India (Sidbi). “This makes the segment high-risk for banks, Muhnot said.

RBI has been pushing banks to give credit to productive sectors of the economy, but there has not been much progress. Even as Sidbi acts as nodal agency to offer finance for small companies, it mostly benefits small units.

On the other hand, the mid-sized corporate segment is a stress area for most banks. For instance, mid-sized firms and SMEs contributed about 67% of the total gross bad loans of Bank of India, the country’s largest lender, on March.