‘Banks will find it very lucrative to fund small/medium units’

Banks, including the proposed ones, will find it extremely lucrative to give loans to micro, small and medium enterprises (MSMEs) as lending to the sector will help preserve margins. As the economy goes through a prolonged slump, MSMEs will continue to grow faster than large companies, says Sushil Muhnot, Chairman and Managing Director of Small Industrial Development Bank of India (SIDBI).

In an interview with Business Line , he outlines the challenges facing the sector and SIDBI’s role in tackling them. Excerpts:

How are MSMEs riding out the current slowdown?

The times are tough for the MSME sector. The existing units are still resilient. Historically, they have grown faster than the large corporates and the trend continues. However, with the large corporates under stress, payments to MSMEs are getting delayed. Also, MSMEs seeking to set up new units are facing difficulties in accessing bank finance.

As a nodal agency how is SIDBI helping these units?

To help existing MSMEs, we are in the process of setting up a factoring company. This was announced in the Budget. We have given a detailed plan to the MSME Ministry.

A factor purchases the receivables from the seller, who in our context is an MSME. The factor then gives such MSMEs about 80-85 per cent of their receivables upfront and later recovers the receivables from the large corporates. This will help in shortening the working capital cycle for MSMEs.

MSMEs in tier-II and tier-III cities are unable to get loans because their applications to banks tend to be very sketchy. The applications lack various details and do not inspire much confidence.

The issue is simply that an aspiring entrepreneur does not know how to go about setting up an industry. Colleges and universities do not teach the steps to be taken. SIDBI’s portal smallb.in gives entrepreneurs information about ideas, how to make a business plan, how to make a proposal to a bank, different government schemes available, kinds of permission required and the registration mechanism.

We also offer paid consultation to the entrepreneur for making a detailed proposal and getting a bank loan approved.

What kind of growth will the MSME sector see this year?

The current bank loan outstanding to the sector is Rs 1.35 lakh crore. This will increase to Rs 1.60 lakh crore by the end of the current fiscal.

Banks will find it very lucrative to fund the MSME sector because they cannot expect to get decent returns from the other sectors.

Loans to the agriculture sector have to be lower than the base rates and home loans interest rates are close to the base rate. Loans to large corporates do not give good returns because they (corporates) tend to pit one bank against another to get a low interest rate. Also, banks have to maintain at least 27 per cent in statutory reserves.

Nowadays, even public sector banks are watched closely by the rating agencies, the analyst community and others. So, if banks want to maintain a good margin then they have to lend to the MSME sector.

Also, a few government policies like the new public procurement policy and the defence offset policy favour the growth of MSMEs.

Where will the next wave of growth for SIDBI come from?

SIDBI plans to lend more this year to the services sector.

This sector contributes about 65 per cent to the GDP but the financing it receives is much lower. Most banks have schemes for manufacturing because it is all security-oriented lending.

In the services sector, there are not many assets to pledge and more cash flow basis financing is required. So, we are working on building separate schemes. It has very good scope.

Traction has started building up in the healthcare and hotel segments. We are hopeful that IT companies and retail chains will find our schemes useful. We have disbursed about Rs 300-400 crore in the past few months. Our target is to lend Rs 3,000-4,000 crore in the current fiscal.

COMMENT NOW