The Hindu Business Line : RBI Governor calls for separate code for lending to SMEs

UK example
The Banking Code Standards Board has evolved a separate Business Banking Code, which covers trades, partnerships, companies with turnover of less than £1 million and clubs charity and association with income of less than £1 million.

Mumbai , July 1

The Reserve Bank of India Governor, Dr Y.V. Reddy, on Saturday asked Banking Code and Standards Board of India to formulate a business banking code for SMEs on the lines of the UK Business Banking Code.

According to him, lending to SMEs in India needs special attention as the sector needs to be nurtured.

In the UK, the Banking Code Standards Board has evolved a separate Business Banking Code, which covers trades, partnerships, companies with turnover of less than £1 million and clubs charity and association with income of less than £1 million.

Dr Reddy was speaking at the inauguration of the Code of Bank's Commitment to Customers here on Saturday. He said financial literacy, which would help customers use information provided by banks, should be encouraged. There is a need to encourage research and study in this area in India.

Financial skills

Here also Dr Reddy citied the example of UK, where the Financial Services Authority has launched a campaign to improve financial skills of the people. In New Zealand, there is an official financial-information Web site with an online game `money island', while the Australian Securities and Investments Commission organises money expos to help investors avoid scams and improve investment choices, he added.

Credit counselling is another relatively unexplored area in India and Dr Reddy said we may have to work further on this. The Bank Negara Malaysia has established a Credit Counselling and Debt Management Agency to provide credit counselling and loan restructuring advice to individuals. Credit counselling can help customers restructure debts relating to household loans, credit card and personal loans, he said.

Penalty charged

Another important issue that banks in India should look into is the difference between the penalties they charge customers for default of payment and the penalty they pay when they delay payment, Dr Reddy said.

"We need to accept that compensation has to be necessarily symmetrical and banks have to put in place procedures that ensure it. Instances have been reported where the interest rate or penalty charged by banks is higher than what banks pay for any delay or default on their part," he added.