BackMid-size firms get short shrift from banks
Loans to medium-sized firms saw a meagre 0.3% growth in 2014-15, according to RBI's sectoral credit data
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Mumbai: Credit to mid-size enterprises has virtually not grown in the past three fiscal years due to the poor health of the segment and a reluctance by banks to lend to smaller companies.
Loans to medium-sized firms saw a meagre 0.3% growth in 2014-15, according to sectoral credit data released by the Reserve Bank of India (RBI) on Thursday. In 2013-14, credit to such enterprises expanded at 2.2% after zero growth in the year before.
While loans to industry as a whole in 2014-15 grew at a mere 5.6%—the lowest in the past five fiscal years—medium-sized enterprises recorded the slowest credit growth. Lending to large companies grew 5.4%, while loans to micro and small enterprises grew at 9%.
The data justifies a recent RBI decision to include medium-sized enterprises in the list of sectors eligible for low-cost priority sector loans. The central bank defines medium-sized companies as those that require an investment of between ₹ 5 crore and ₹ 10 crore.
One reason for the reluctance to lend to the segment may be the deteriorating credit profile of small and medium enterprises (SMEs), which have been impacted by lower capital expenditure on the part of big companies, hurting the entire supply chain.
“Over 40% of SMEs are distressed because they do not have enough operating funds to service their interest costs," said Deep Mukherjee, senior director, corporate rating, India Ratings and Research. Investments in small and medium companies had suffered due to deteriorating working capital cycle of larger companies, he said.
“Margins of large companies have been falling. They have been delaying payments to small and medium enterprises," Mukherjee said.
Another reason for banks’ reluctance to lend to SMEs is their steady rise in bad loans. Stressed assets in the banking sector, which include bad as well as restructured loans, are at 10.7% of total advances, according to data cited by RBI officials.
“Overall systemic growth has slowed. Most public sector banks have been impacted by the slowdown in the economy and other policy-related issues. Their non-performing assets have risen and many projects have failed to take off," said Pralay Mondal, group executive vice-president and country head at Yes Bank Ltd, explaining the dismal credit growth to industry, especially smaller firms.
Mukherjee echoed Mondal’s views.
Most banks have stopped extending collateral-free loans to medium-sized enterprises, according to Chandrakant Salunkhe, founder and president of the SME Chamber of India. “There is no thrust for SMEs in the Make in India programme," he said. “RBI has paid no heed to the problems of SMEs."
Salunkhe also hit out at banks for adopting a tougher line with smaller firms when it comes to loan recovery while going easy on large corporate borrowers who may have larger dues.
The situation, while grim, is unlikely to change in a hurry, given the inconsistent growth seen in industry. Unless spending by large companies picks up, the working capital cycle will remain stretched.
“In 3-4 quarters from now, we will see some signs of improvement. That’s when government spending will pick up and large companies will start performing," said Mandal, injecting a dose of optimism.
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