Money & Banking

Banks want interest rate cap raised for collateral-free loans to micro, small units

K. Ram Kumar Mumbai | Updated on January 27, 2013 Published on January 27, 2013

Currently, the credit guarantee scheme covers credit facilities not exceeding Rs 1 crore to a single eligible borrower in the MSE sector.

Banks have sought flexibility to charge a higher mark up on their minimum lending rate on collateral-free loans given to micro and small enterprises (MSEs) under a credit guarantee scheme.

They have moved the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in this regard.

Lenders want the interest rate cap on collateral-free loans given to MSEs under CGTMSE’s credit guarantee scheme (CGS) to be set at four percentage points above their minimum lending rate, which is also known as the base rate. The governing council of CGTMSE, however, has proposed that the interest rate cap on collateral-free loans to MSEs should be two percentage points above individual bank’s base rate.

The feedback from banks comes at a time when the CGTMSE scheme is being tweaked to reflect the shift in banks’ lending rate benchmark from the benchmark prime lending rate (BPLR) to the base rate (BR) with effect from July 1, 2010, said a senior CGTMSE official.

The average base rate of banks is currently in the 9.75-10.50 per cent range. Going by the CGTMSE governing council’s proposal, banks’ lending rate to MSEs under the CGS cannot exceed the 11.75-12.50 per cent range.

However, if banks’ contention on higher interest rate cap were to be accepted, then their maximum lending rate to MSEs under the CGS would be higher — 13.75-14.50 per cent range. In view of the feedback from banks, the CGTMSE official said the Ministry of Micro, Small and Medium Enterprises will have to take a call on the interest rate cap on loans given under the CGTMSE cover.

Currently, the CGS covers credit facilities (fund based and/ or non-fund based) not exceeding Rs 1 crore extended by banks and select financial institutions to a single eligible borrower in the MSE sector.

Further, the cover is available only if loans are sanctioned to MSEs within the interest rate cap of three percentage points above the BPLR. The credit guarantee scheme seeks to reassure the lender that in the event of a MSE unit, which availed of collateral free credit facilities, fails to discharge its liabilities to the lender then the CGTMSE would make good the loss up to 85 per cent of the credit facility.

CGTMSE, which was set up by the Government of India and Small Industries Development Bank of India in 2000, has extended guarantees for loans aggregating to over Rs 38,000 crore covering approximately eight lakh MSEs as on March 31, 2012. According to the latest Reserve Bank of India data, banks’ loans to MSEs have slowed down. In the financial year, so far (up to November-end 2012), banks’ loans to MSEs nudged up by just 1.4 per cent against 4.1 per cent in the year-ago period.

As on November-end 2012, banks’ loans to MSEs stood at Rs 5,26,200 crore (Rs 5,19,100 crore as on March 23, 2012).

> [email protected]

Published on January 27, 2013
This article is closed for comments.
Please Email the Editor