The Reserve Bank of India (RBI) recently emphasized the need for banks to lend more to small and medium sized enterprises (SME). Banks were in fact instructed to increase credit to SMEs up to 55% of total SME financing by 2012 and 60% by 2013. During its annual review meeting with banks, RBI also discussed issues in infrastructure, skills development, and creating awareness around credit guarantees for SMEs.

While bank advances were growing above 20 per cent yearly, lending to small and micro enterprises (SMEs) should also grow at a decent pace, the Reserve Bank of India (RBI) told banks in the annual review meeting of its standing advisory committee on SMEs on Tuesday.

“Credit growth is more than 20 per cent, higher than RBI’s projection. In Tuesday’s meeting, the focus was that micro credit also should grow. Banks will try to see how to step up credit, especially to small manufacturing units,” said D L Rawal, chairman and managing director, Dena Bank.Lending to SMEs is affected in this rising interest rate scenario. The borrower’s loan repaying capacity is also likely to be impacted. “As of now, there are no concerns on asset quality in the sector but if interest rates keep increasing there could be some non-performing assets across sectors going ahead,” Rawal added.
According to data provided by RBI, bank credit to SMEs grew by 13 per cent in May, as compared to 14.8 per cent growth in the same month in 2010. Lending to the sector constituted 6.3 per cent of the total non-food credit and 14 per cent of the total credit to industries in May.

Punjab National Bank Chairman and Managing Director K R Kamath, who also attended the meeting, said banks were given instructions to step up credit to the micro and small units to 55 per cent of the total SME financing by 2012 and 60 per cent by 2013.

Also, the number of accounts should grow by 10 per cent every year, said Rawal.

Issues in areas of infrastructure, skill development at ground levels and creating awareness on credit guarantee trust for micro and small enterprises at grass roots levels were also discussed in the meeting.

Chiefs of State Bank of India, Union Bank of India and Syndicate Bank were among others who met RBI Deputy Governor K C Chakrabarty on Tuesday. The standing advisory committee was set up by RBI under the chairmanship of one of its deputy governors that reviews credit flow to SMEs regularly. Citing inflation concerns, RBI has increased policy rates 10 times in the last 15 months. According to RBI data, credit growth has shown some signs of moderation. As on June 17, annual growth in bank advances was down to 20.7 per cent, from 22.2 per cent as on May 20. But it is still above RBI’s projection of 19 per cent credit growth in the financial year 2011-12.

“Credit growth in the first quarter is usually dim historically and I hope it will pick up later in the year. Credit growth will be there but not to the extent of last year,” said Rawal.