Bank credit may get costlier for SME sector: FIEO
Ravi Samalad 30 December 2009

Banks are lending idle cash for higher returns to companies for advance tax payments which has sucked up about Rs40,000 crore to Rs45,000 crore from the system

Bank credit to Small and Medium Enterprises (SMEs) is likely to get costlier as lenders are shying away from lending to this sector due to a fear of hike in cash reserve ratio (CRR) by the Reserve Bank of India (RBI), says an industry body.

A Sakthivel, president, Federation of Indian Export Organisations (FIEO), said that while credit off-take had picked up marginally to double digit levels (10.5%) from last year’s high of 26.4%, banks are lending idle cash for higher returns to companies for advance tax payments, which has sucked up about Rs40,000 crore-Rs45,000 crore from the system.

This is supported by RBI data (as on 23 December 2009) which says that banks parked Rs40,000 crore through the reverse repo auction as against Rs90,000 crore on 14th December, a day before the payment of the third instalment of advance tax.

The FIEO president said that the inclination of the banks to lend to the larger corporates, increasing call money market rate (from around 2% at the previous closing to 3%-3.25% at present), and a possibility of increase in cash reserve ratio (CRR) would impact interest rates for the SME export sector.

Mr Sakthivel pointed out that the lending to the priority sector has dropped to 17.5% as against 22.7% last year while lending to services sector has seen a sharp fall to 11% from 33.7% last year, reflecting a higher risk perception.

"The RBI has already started the first phase of 'exit' in its October 2009 policy statement, though primarily in terms of signalling the stance rather than affecting the liquidity conditions or the interest rate. The evolving growth-inflation conditions will dictate the future course of action from the RBI," Shyamala Gopinath, deputy governor, RBI, had said.

Small Industries Development Bank of India (SIDBI) is currently lending at 11.25% to 13.25% per annum to the services sector.

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