SME sector comes into sharp focus

Published : September 27, 2005 - Sify.com

After several decades, the focus on the small and medium enterprises has shifted from offering
sops, to assessing their creditability and debt repayment capabilities. The government and RBI
have announced policy packages to this effect and rating agencies have spurted to help banks
and financial institutions make SME lending a profitable venture.

The small and medium enterprise (SME) sector has come into sharp focus with a policy package
announced by the government recently, envisaging public sector banks to fix their own targets for
funding this sector in order to achieve a minimum 20 per cent year-on-year growth in credit to the
sector. In addition, these banks are required to follow a transparent rating system with cost of
credit linked to the credit rating of the enterprise. Further, the package requires commercial banks
to make concerted efforts to provide credit cover on an average to at least five new tiny, small
and medium enterprises per year.

Though it appears to be a tall order for the banking sector, the guidelines have been embraced
with enthusiasm. Several banks, including foreign banks like Citibank and Standard Chartered
Bank have set up special cells and branches dedicated to SME lending.

The SME sectors preferred by bankers for lending include bulk drugs, knitwear and auto-ancillary
goods. Textiles, pharmaceutical companies, chemicals and dyes sectors also continue to find
favour with banks as these businesses are thriving.

Enterprises like gems and jewellery, seafood processing, sports good etc are not preferred, as
banks have suffered huge non-performing assets on account of lending to these sectors over the
past few years.

However, the new government package is accompanied by reworked guidelines from the
Reserve Bank of India on the debt restructuring mechanism for SMEs with outstandings of up to
Rs 10 crore. This can help banks assess the SMEs, which they now perceive as untouchable.

According to the RBI guidelines, banks could decide the acceptable viability benchmark,
consistent with the unit becoming viable in seven years and the repayment period for restructured
debt not exceeding 10 years.

Accounts classified by banks as “loss assets” would not be eligible for restructuring. Additional
finance would be treated as a ‘standard asset’ in all accounts up to a period of one year after the
date when first payment of interest or of principal, whichever is earlier, was due. RBI has also
asked banks to formulate a debt-restructuring scheme for SMEs. These guidelines are geared to
help banks renew their focus on this sector.

Crisil has stepped in to provide a rating service for the SME sector. According to this rating
programme, SMEs would be rated on a scale of one to eight, with scale one indicating the highest
credit quality and the scale eight, hinting at default possibilities. The ratings assigned to SMEs
would also function as a self-improvement tool for them.

To top all initiatives, SBI, ICICI Bank and Standard Chartered Bank, have agreed to join hands
with the Small Industries Development Bank of India (Sidbi) to float a rating agency for the SME
segment. The rating agency, Small and Medium Enterprises Rating Agency (SMERA),
inaugurated recently, will rate the company’s overall strength, unlike most rating agencies whose
core business are to rate debt instruments.
While Sidbi will have largest share of 22 per cent followed by SBI, ICICI Bank and international
credit information company Dun & Bradstreet, which would be at 10-13 per cent. Five other public
sector banks hold about 28 per cent. These are Punjab National Bank, Bank of Baroda, Bank of
India, Canara Bank and Union Bank of India. Credit Information Bureau of India (Cibil) is also
likely to join the company shortly.

Most small and medium companies rely on extremely expensive funds sourced from the
unorganised financial sector. Part reason why bank credit is denied to many small units, despite
repayment capacity not being suspect, is that lenders often do not have the capability to assess
their risk. Rating agencies are a step in this direction.

With a brand new government package, reworked guidelines for lending by the RBI and the
facility of rating enterprises not just for their creditability and debt repayments, banks can now
refocus on the SME sector.