The Hindu Business Line : Collateral-free loans: Small units out of banks' loop

IT is now three full years since the Credit Guarantee Scheme was launched to enable banks lend to small-scale units without making them pledge their assets for the loans. But statistics show that the scheme has been ineffective.

Till January 8, only 12,700-odd units have been given guarantees for loans involving Rs 161 crore, according to sources in the Small Industries Development Bank of India (SIDBI).

"If only 12,700 of the 33 lakh small units in the country have benefited from the scheme and that too over three years, then God help us," says Mr D.E. Ramakrishnan, President, Industrial and Financial Reconstruction Association for Small and Tiny Enterprises, a small industries body.

The scheme is administered by the Credit Guarantee Fund Trust for Small Industries, a Trust set up by the Union Government and SIDBI. The trust stands guarantee to loan up to Rs 25 lakh given to a small unit by a member lending institution.

The small-scale sector complains of being stifled by the banks' reluctance to lend, except against securities whose value is often many times the quantum of the loan.

Mr V. Parthasarathy, Managing Director of the Rs 1.5-crore Wave Current Automotives, rues that for a working capital of Rs 20 lakh, he has had to hypothecate his house worth today over Rs 1 crore.

Mr V.L. Sridharan who owns the Rs 7-crore Econo Valves, complains that his application for a Rs 25 lakh export packing credit (working capital for export production at a cheaper rate) has been pending with the State Bank of India for over five months, because he refuses to give any collateral.

"My entire plant and machinery is pledged to the bank. I have never defaulted on my repayments. Why should I give a collateral?" asks Mr Sridharan.

Mr Ramakrishnan blames banks for the "tardy implementation" of the credit scheme. "The trust is very fast. Approvals are given online and often in just a few hours. But it is the banks which do not lend," he told Business Line.

Dr A.M.V. Reddy, Assistant General Manager in State Bank of India, says that the scheme is usually invoked either for new loans or when existing borrowers ask for further loan, but not when an existing loan comes up for a renewal. But until recently, few SSI units have asked for fresh loans or enhancements.

Dr Reddy admitted that it was a "mindset problem" at the operational levels. But now that the economy is looking up and there is a hunger for funds from SSI units, the `mindset' is also changing, he said.

Businesswise, the small-scale units have never had it so good as now. Their orderbooks are full, capacity is the only constraint. They have but one problem — funds. Money still costs at least 12.5 per cent, it is almost impossible to change the banker, collateral requirements are sky-high, decisions take months...

These problems are not new but they are hurting more now, because need for funds is more. When business grows, companies like Wave Current and Econo Valves will require more working capital. Pledging assets with banks weakens the companies' balance sheets and reduces their ability to attract capital funds.

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