Excluded from credit

Ved Electricals, a small electric appliances shop in Hyderabad’s Rajendra Nagar, does not have a bank loan, despite having a current account and a long relationship with a bank. The reason — they need an overdraft of just ₹5 lakh, but the bank insists that they can only give a minimum overdraft of ₹10 lakh, that too against acceptable collateral. Similarly, Prasanna, a travel agent who needs a working capital loan of ₹3 lakh, is not able to secure a collateral-free loan for his business.

The access to formal finance of Ved and Prasanna and many more such enterprises may remain a distant dream even going by the new priority sector credit policy released by the RBI in April this year.

Micro enterprises usually fall under proprietary, partnership and LLP categories, and account for less than 1 per cent of private limited companies. The ‘Make in India’ dream to a large extent depends on the fillip given to these enterprises in providing start-up funds, hassle-free, collateral-neutral working capital and marketing and branding support from the anchor industries or large industries. These enterprises are the lifeline for large and medium enterprises. These have also been precisely experiencing delayed payments for their supplies from their principals both from private large enterprises and government enterprises.

Most commercial banks are averse to lending to small enterprises due to the small ticket size, lack of collateral and due diligence requirements for credit assessment. Since bank branches are normally given targets in rupee value for lending, they always find it easier to either lend towards retail loans such as car /personal loans, or housing loans, which facilitate arm-chair lending.

Medium enterprises are enterprises with investment in fixed assets amounting to ₹5-10 crore. The inclusion of medium enterprises under the priority credit dispensation by the RBI would lead to a continuation of the present scenario — which denies collateral-free credit to small enterprises. The only silver lining is the allocation of 7 per cent of average net bank credit for micro enterprises during the current year and another half per cent from the next year. This move of the RBI seems to be geared towards helping commercial banks meet their priority sector norms, rather than promoting the cause of delivering credit to the financially excluded population.

Medium enterprises, as such, are not starved for credit as their requirements are large. Further, they are often able to provide factory building/land as collateral. This is also why medium enterprises have been excluded from the coverage of CGTMSE, a collateral free lending scheme, which covers loans up to ₹1 crore, typically taken by micro and small enterprises.

Priority-sector lending is targeted at financially excluded populations and medium enterprises do not qualify as one. Their inclusion will only make small enterprises even more excluded. For banks, achieving the target of 7 per cent of loans to micro enterprises is no big deal. Had the RBI prescribed the number of new micro enterprise accounts in banks’ books per branch, with sub-targets for rural and semi-urban areas, it would have done a great job. There is still time to do this.

The writer is an economist and risk management professional

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