Money & Banking

‘Competition among banks will cut SME borrowing cost’

| Updated on: Jul 01, 2016

Indian Merchant Chamber President-elect makes strong pitch for more foreign bank branches

The cost of funding for micro, small and medium enterprises (MSMEs) can be bought down substantially by unleashing competition among banks. Removing restrictions on foreign banks opening more branches will do the trick, said Deepak Premnarayen, President-elect, Indian Merchant Chamber, in a chat with Business Line .

Dismissing the myth that foreign banks are not interested in servicing MSMEs, Premnarayen said the government and RBI should facilitate foreign banks to bring in more money and use technology to bring down cost. Foreign banks are currently allowed to open only 12 branches a year due to India’s commitment to WTO.

“RBI should allow foreign banks to open at least 100 branches a year and channel more fund into the banking system by implementing capital account convertibility. The sea change in the way telecom services were offered before and after liberalisation is there for all to see,” said Premnarayen, who is the Non-Executive Director of FirstRand Bank and Executive Chairman of ICS Group which is into financial services.

Large corporates get funding at 8 per cent while MSMEs are left to borrow at 16-18 per cent through informal sources. Though foreign banks service MSMEs currently, the scope is limited by operational constraints, he said.

The business opportunity is huge as India has over 45 million SMEs, accounting for nearly 40 per cent of gross domestic product.

According to a recent RBI study, there are about 240,000 unlisted small- and medium-sized enterprises (SMEs) and their earnings growth has outpaced listed companies in the past three years.

Premnarayen said foreign banks can use technology and bring down the cost of processing loans and use the cost saving to help MSMEs mend their accounting procedures.

Today, banks spend of about ₹200-300 to process a loan application. It can be bought down to ₹50 if processed electronically, he said.

Published on January 17, 2018

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