CURBS on external commercial borrowings (ECB) will have an impact on the lending to small and medium enterprises. With the increased cost of overseas borrowings for corporates and a subsequent liquidity squeeze, SMEs will be affected due to longer repayment cycles of the corporates, bankers feel.
Most public sector banks classify SMEs based on their investment in plant and machinery up to Rs 10 crore as per guidelines of the ministry of small-scale industries. The SMEs typically do not go in for ECBs, but depend on banks for their working capital loans. SMEs are already facing the heat with increase in interest rates, power shortages, rupee appreciation among other issues. With the services sector dominating the SME, and large corporates outsourcing their various requirements to Indian service providers, repayment cycles become crucial, bankers said.
For working capital up to Rs 5 crore, SMEs are further constrained by the Nayak Committee guidelines, that prescribe a turnover method for financing working capital needs of the SMEs at 20% of the projected turnover based on the assumption of a three-month operating cycle.
“Invariably SMEs suffer on account of delay in repayment by large corporates and subsequently loose orders. Though banks provide a 80-85 day cover to meet working capital requirements, the credit cycle for larger corporates extend to 90 days in times of liquidity crunch and adversely affect SMEs,” an official at State Bank of India said. In case of such delays, SMEs come back to banks for additional limits to keep up with working capital needs, he added.
The SME lending at SBI grew by 35%, more than the industry average. SME lending has not been growing at par with the overall credit growth. When overall credit was growing at 30%, SME lending was in the order of 25%.
For Punjab National Bank (PNB), while the credit growth was at 29% during 2006-07, the growth in SME lending was 24%. The size of the SME portfolio is about Rs 14,000 crore for PNB.
“Due to the curbs on ECBs, it will not have an impact on big corporates, because for large projects there is automatic approval under RBI. However, for mid-corporates and SMEs, the component of imported machinery is higher in proportion to the overall cost of the project, they are likely to face pressure,” PNB general manager (credit section) LP Aggarwal said.
Last week, the government introduced curbs on companies going for ECBs to meet domestic expenses. These companies will now look for local banking channels. They can now raise only $20 million through ECBs for rupee expenditure after taking RBI permission. Larger corporates were looking for external funds to take advantage of the interest rate arbitrage.