The Hindu Business Line : `Reduce interest rate on foreign banks' deposits with SIDBI'

THE RBI-appointed working group on flow of credit to the SSI sector has recommended that the interest rate on deposits maintained by foreign banks with the Small Industries Development Bank of India (SIDBI) representing shortfall in lending to the priority sector by foreign banks be cut in order to encourage direct lending to the SME sector.

Currently, SIDBI offers foreign banks 6 per cent rate of interest on one-year deposits. This is higher than the market rate of 4.5-5 per cent and therefore does not serve to penalise the banks that do not meet the lending targets, explained a SIDBI official.

The interest rate payable by SIDBI to foreign banks on priority sector lending shortfall deposits, may be pegged at a rate which does not act as an incentive for the foreign banks to keep the deposit with SIDBI, rather than directly meeting the credit needs of the SME sector, said the report submitted by the working group.

The working group headed by Dr A.S. Ganguly has also made a case to increase the term of these deposits from one year to three years in order to enable SIDBI to better manage the long-term loans it disburses to the SME sector.

The working group constituted following a statement in the November 2003 Credit Policy has suggested a uniform target in priority sector lending (including SSI) at 40 per cent of net bank credit for all domestic and foreign banks so as to ensure a level playing field and faster development of the sector.

At present, domestic banks have to lend 40 per cent of their net bank credit to priority sector while foreign banks have to meet only a lower figure of 32 per cent.

The group has recommended that all SSI units without a ceiling (of Rs 25 lakh which is currently in place) may be covered under the Credit Guarantee Trust for Small Industries scheme. The guarantee cover may also be extended to the extent of 90 per cent of the credit.

The group has suggested setting up of a number of funds. A new fund called the Collateral Reserve Fund is proposed with an initial corpus of Rs 100 crore to be contributed by the Government of India, SIDBI, Nabard, State Governments and banks with a view to providing support to first generation entrepreneurs who find it very difficult to furnish collateral securities or third-party guarantees. Another fund suggested is the `Reconstruction Fund', which may be set up in SIDBI. The Government/RBI, the group suggested, should provide the initial corpus.