The Reserve Bank of India (RBI) has directed public sector banks to set up specialised branches for small and medium enterprises (SMEs) to cater to the fast-growing SME sector.

This is in addition to the directive to redesignate the specialised Small Scale Industries branches as SME branches.

The RBI has issued the two directives recognising the need for SMEs to secure easy access to credit and specialised service and transaction costs.

“Banks have been advised to adopt cluster-based approach to SME financing and displaying instructions ô guidelines formulated by banks as well as by RBI on their websites. Banks have also been advised to identify and select clusters of SME units which share a homogeneity and critical mass. A cluster-based approach also offers possibilities of reducing transaction costs and mitigation of risks for SMEs,” said Devaki Muthukrishnan, Regional Director, RBI.

Addressing a seminar on ‘Emerging Trends in Banking Products — Focus on SMEs and Exporters’, organised by the Federation of Karnataka Chambers of Commerce and Industry, she said: “Banks have to fix their own targets for funding SMEs in order to achieve a minimum 20 per cent year-on-year credit growth to SMEs. The objective is to double the flow of credit from Rs 67,600 crore in 2004-05 to Rs 135,200 crore to the SME sector by 2009-10 within a period of five years.”

Further, the RBI has asked the banks to adopt a simplified, non-discretionary and non-discriminatory mechanism for one-time settlement of chronic non-performing assets below Rs 10 crore in the SME sector.

“A debt restructuring mechanism for units in the SME sector has also been put in place by banks with outstanding up to Rs 10 crore,” she added.

In order to increase the flow of credit and institutionalise appropriate risk management systems for SME lending, Credit Information Bureau of India Ltd (CIBIL) has been operationalised by the RBI.

“This is to ensure that there can be proper and transparent dissemination of the SME financials for easy and objective assessment of their credit quality by banks. This would help in reducing the transaction cost and improving the credit flow to the SME sector,” Muthukrishnan said.

On measures taken by RBI for the benefit of exporters, she said the interest rate on exports was available at a concessional prime lending rate (PLR) of 2.5 per cent. “In the wake of rupee appreciation against the US Dollar, the RBI has reduced the PLR to 4.5 per cent for both pre-shipment and post-shipment credit advances,” she stated.

With a view to simplifying procedural requirements for the SME sector, the RBI recently granted flexibility for hedging both underlying as well as anticipated and economic exposures without going through the rigours of complex documentation formalities.

“To ensure the SMEs understand the risks of these products, only banks with whom they have credit relationships are allowed to offer such facilities,” Muthukrishnan said.

Mr. Divya Aggarwal

Money Management Consultants Ltd

Senior Copy Editor, Money Management Consultants Ltd
New Delhi, India

Free Member, Joined :05/11/2007
No of Topics Posted : 113
Reply/Comments : 14