Small Loans Will Save Banks

Bank lending to small, tiny units must be stepped up, says K.C. Chakrabarty-Business Line

MUMBAI, DEC. 4:  

Banks need to urgently step up lending to micro, small and medium enterprises (MSMEs) to bridge the wide gap between credit demand and supply in the sector, which is crucial for the economy, according to K. C. Chakrabarty, Deputy Governor, Reserve Bank of India.

In 2012-13, the RBI estimated the incremental credit demand from and supply to the MSME sector at Rs 2,33,190 crore and Rs 1,64,466 crore, respectively, translating into a demand-supply gap of Rs 68,724 crore.

Chakrabarty observed that in the absence of alternative sources of funding for the sector, the role of banks is crucial in bridging this funding gap.

In this context, it is important for banks to look beyond their existing customer base and the large corporates and to reach out to the vast number of MSMEs, which are deprived of bank credit.

The Deputy Governor underscored that one of the major challenges faced by MSMEs, particularly micro and small enterprises (MSEs), is access to timely and adequate credit from the banking sector.

“The lenders are reluctant to service the MSEs for a number of reasons, the foremost of which emanates from a general perception amongst banks that the credit risk in lending to small and medium borrowers is very high.

“This, in itself, is a wrong notion that I have been trying to dispel…,” he said at a workshop on credit scoring model.

The Deputy Governor observed that while the headline numbers of non-performing assets (gross and net NPAs) are higher in this (MSE) segment, if one reckons the extent of restructuring and write-offs that are resorted to in the medium and large borrower segments, the credit risk would appear to be much lower in the MSE sector.

Impaired assets

As at March-end 2013, the impaired assets ratio (IAR) of MSEs was relatively lower at 10.6 per cent, against 14.8 per cent for medium and large enterprises.

IAR is calculated as the sum of GNPAs, restructured standard advances and cumulative write-off to total advances and cumulative write-offs.

The IAR data clearly highlights that in the recent scenario of rising impairment of assets in the banking sector, it is MSEs that have demonstrated better credit discipline resulting in lower impairment.

Chakrabarty said a major constraint in banks’ lending stems from the fact that the existing system of credit appraisal and related processes are not geared to appraise the financial requirements of the MSE sector.

For evaluating loan proposals and to facilitate SME financing, banks will need to employ low-cost and quick decision-making alternatives.

The use of credit scoring models can go a long way in facilitating lending decisions by reducing costs and increasing service levels, which can deliver great benefits for both lenders and MSE borrowers.

http://www.thehindubusinessline.com/industry-and-economy/banking/bank-lending-to-small-tiny-units-must-be-stepped-up-says-kc-chakrabarty/article5422228.ece

Create awareness among consumers on credit scores: RBI

DEC. 3:  

The Reserve Bank of India has urged credit information companies (CICs) to create awareness among consumers about credit behaviour and credit scores to manage their finances better.

Delivering the keynote address at the fourth annual CIBIL Credit Information Conference here on Tuesday, J. Sadakkadulla, Regional Director (Chennai), RBI, said: “The key deliverable for CICs in the coming days would be to facilitate a smoother credit decision-making process and, thereby, bring down the cost of financial transactions and credit intermediation in the financial system for the benefit of the masses.”

Observing that credit information has enabled faster access to credit from financial institutions, he said, “India stands at a decent 28th rank amongst 189 countries on the ease of getting credit and has the best ranking amongst the BRICS economies — China is at 73, both Russia and Brazil are at rank 109.

However, he pointed out that though India has a large workforce with rising disposable incomes, the extent of credit penetration is still quite low compared to global standards. One of the reasons for this is the information asymmetry between the lender and the borrower. Emphasising the need for a genuine database, he urged scheduled commercial banks, non-banking finance companies and housing finance companies to submit accurate data on regular basis. “The use of CIC inputs during the credit appraisal process at lending institutions can only be effective if the data is up-to-date,” Sadakkadulla said.