The Reserve Bank of India-appointed working group on flow of credit to the SSI sector has recommended a uniform target for priority sector lending (including small scale industry) at 40 per cent of net bank credit.
The target is aimed at providing a level playing field for all banks and ensuring their active participation in the development of the priority sector.
The group, headed by A S Ganguly, emphasised that in an environment of high economic growth, priority sector lending is an attractive growth opportunity for banks and financial institutions.
"Slowing down of credit offtake by large corporates due to opening up of new sources for accessing finance and stagnation of credit demand by retail business, makes financing the priority sector an opportunity to expand banks' business profitably," it said.
The group diagnosed that the present slowdown in lending to the SME sector is principally due to the risk aversion arising out of a high proportion of the lending becoming non-performing.
To tackle this it emphasised the need for new vehicles and instruments viz, bank promoted (non-deposit taking) NBFCs, micro credit intermediaries dedicated to SME financing etc.
Such micro credit intermediaries (funded by individual or a group of banks would be able to credit-rate and risk assess and serve as instruments for extending quick credit to SME clusters accredited to them.
In order to enable lending institutions take more objective decisions and appropriate rating mechanism for designated industrial clusters needs to be put in place.
Towards this end, the group suggested that a scheme may be designed jointly by Crisil, IBA, Sidbi and SSI associations.
Corporate-linked SME cluster models need to be actively promoted by banks and FIs.
The group, while expressing concern at the ineffective implementation of the provisions of the "Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act", has urged the government to take urgent steps to enforce the provisions of the Act especially in public sector enterprises.
It said that the definition of a tiny enterprise may be redefined as one with turnover up to the financial limit of Rs 2 crore (Rs 20 million); small enterprise as one with turnover up to the financial limit of above Rs 2 crore and up to Rs 10 crore (Rs 100 million); and medium as one with turnover up to the financial limit of above Rs 10 crore and up to Rs 50 crore (Rs 500 million).
Three strategies for pushing credit to the priority sector have been outlined: The first leg is dedicated at those units which have linkages with large corporate undertakings as vendors or suppliers.
To these units, provision and flow of credit could be tied up with the large undertakings which would facilitate recovery. Linkages will lead to technology transfer from the corporate to the small units.
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