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Our Bureau

Mumbai, Dec 15 Micro, Small and Medium Enterprises (MSMEs), buffeted by the global and domestic economic turmoil, may have something to cheer about following the package announced by the public sector banks.

The PSBs have decided to reduce interest rates on borrowings by micro enterprises by 100 basis points and SMEs by 50 basis points, grant need-based adhoc working capital loans, re-schedule term loans, and allow second restructuring on a case-to-case basis.

According to the Indian Banks’ Association (IBA), the apex body of banks in India, interest rates for borrowings by micro enterprises (units with investment in plant and machinery not exceeding Rs 25 lakh in the manufacturing sector and Rs 10 lakh in the service sector) have been reduced by 100 basis points for all existing and new loans with immediate effect.

In the case of small enterprises (units with investment in plant and machinery between Rs 25 lakh and Rs 5 crore in the manufacturing sector and between Rs 10 lakh and Rs 2 crore in the service sector) and medium enterprises (units with investment in plant and machinery between Rs 5 crore and Rs10 crore in the manufacturing sector and between Rs 2 crore and Rs 5 crore in the service sector), interest rates have been reduced by 50 basis points with immediate effect.

The reduction in interest rates by banks would be with reference to the rates prevailing on November 30, 2008. Though banks have done the government’s bidding by announcing a series of measures to alleviate the turbulent economic scenario being faced by MSMEs, they have not yet heard from North Block about getting interest rate subvention.

“The reduction in interest rates, at best, is a mere tokenism on the part of public sector banks, which have very little leeway in their spreads anyway,” said Mr D.E. Ramakrishnan, President, Industrial and Financial Reconstruction Association for Small and Tiny Enterprises (IFRASTE).

According to Mr Ramakrishnan, micro enterprises usually borrow at benchmark prime lending rate, which currently ranges between 12.50-13.25 per cent for PSBs, plus 400 basis points while small and medium enterprises can avail of loans at slightly better rates.

Though banks can now take up a second restructuring of SME accounts on a case-to-case basis, MSME representatives feel that the issue of viability of the units would need to be given a serious consideration.

As per the measures announced by the IBA, banks can grant need-based adhoc working capital demand loans up to 20 per cent of the existing fund-based limits in respect of units having overall fund-based credit facility up to Rs 10 crore. The loan will be repayable in one year with a provision of moratorium of six months during which only interest will have to be serviced.

IFRASTE, in fact, had sought grant of adhoc working capital demand loans up to 80 per cent of the existing fund based limits.

Banks would henceforth be pro-active and forthcoming in sanctioning adequate increase in working capital limits in view of the current scenario of stretched shipment and receivables cycle resulting in elongated operating cycle of business.

MSMEs will be granted relief by way of reduction in the margin on receivables. Further, receivables up to six months will be reckoned for book debt financing. Based on needs, cash margins on letters of credit/guarantee will also be reduced.

Banks would extend the moratorium period in respect of loans availed by MSMEs where project implementation has been delayed. The IBA, however, has not specified the moratorium period.

For units unable to repay term loan obligations on time, repayments will be rescheduled/rephrased on a case-to-case basis within the overall loan policy of the respective banks. MSMEs can now get finance for purchase of gensets on soft terms. But what the soft terms are have not be specified.

More Stories on : Housing Finance | SSI | Public Sector Banks

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