SBI takes credit guarantee cover for MSE loans below Rs 1cr

Saikat Das
Moneycontrol.com

India's largest lender the State Bank of India (SBI) has decided to buy credit guarantee cover for its loans below Rs 1 crore to micro and small enterprises (MSE), which are more prone to defaults in an environment of economic gloom and doom. This will help the bank to recover loan amount in case any borrower stops repaying.

"We have decided to de-risk by taking credit guarantee of CGTMSE for Micro and Small Enterprises (MSE)," Manas Nag, Chief General Manager (SME Business Unit), State Bank of India told Moneycontrol.com on the sidelines of a conference.

"All loans up to Rs 1 crore will be mandatorily covered by the gurantee. All new loans upto Rs 1 crore will be covered under this. So far in FY13, we have sanctioned around Rs 900 crore in this category. For the full year, it is going to be around Rs 3000 crore. The pace will pick up in the second half of the financial year. MSE contributes around 18% of our total loan book size," he said.

The ministry of micro, small & medium enterprises (MSME) launched the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to ensure collateral free flow of credit to the MSE sector. The Government of India and SIDBI are the two stake holders. The pact of taking credit insurance was singed between CGTMSE and SBI back in December, 2009. Recently, SBI took similar insurance cover from Export Credit Guarantee Corporation of India (ECGC) for its loans to exporters.

Cost of credit guarantee...

SBI pays premium in the range of 0 .50 to 0.75% p.a. of the ticket size. The lender does not find any problem regarding claim settlement. Every PSU lender is mandated to achieve 20% yearly growth in MSE sector irrespective of any economic condition. The only way, according to Nag is to mitigate risk of defaults by taking credit cover.

MSE growth in FY13...

"We are not looking at any contraction of SME book. We are trying to achieve 18% growth in MSE, a part of whole SME book. We may fall short of our aim. In FY12, the growth was at 15.6%, far short of the target 20%, mandated by the government of India," Nag said. In FY12, SBI's whole SME book grew more than 16% to Rs 1.39 lakh crore.

Meanwhile the bank is looking at cluster financing and trying to push for more credit clusters, wherein loans are given with sectoral concentration. The government has identified around 500 such groups. SBI will be mainly targeting 100-200 big clusters. For example, auto clusters in Pune and Faridabad; pharmaceutical cluster in Himachal.

"We try to push credit through these clusters. We are trying to map some our branches telling our branches to reach out some of our clusters to bring loan proposals from them. We have re-designated 400 odd branches as SME branches. This will give them focus. We want to consolidate the position in these branches," commented the chief general manger.

Loan recast: Not a reality in MSE sector

There is little scope restructuring of bad loans involving SMEs. The promoters of MSEs do not have enough wherewithals to bring in fresh capital. It is extremely difficult to restructure an account in MSE segment, according to SME head of SBI.

"When an account becomes NPA, its equity is wiped off. Further lending by banks can only happen when there is an equity top-up. These small businessmen find it very difficult to add equity capital. They also don’t find anybody aiding them with equity support," he explained.

In case of any default, the lender makes provision (15% on sub-standard assets) for the whole account and after a certain period of time, it writes if off.

On asset quality...

In an economic downturn, micro and small businesses gets hit first. So, this is the most vulnerable sector and it will continue, observed the veteran banker.

"We have seen some tapering of slippages. We need to watch what happens in Q1 and Q2 in FY13 before we call it a trend. Other than looking at our credit sanctioning norms and taking credit guarantee cover, there is precious little we can do," he said. Micro, small and medium enterprises roughly formed 25% of gross NPAs in Q4, FY13.

Lending rates...

We have recently slashed rates by 100-350 basis points in different SME products. Now, the broad interest range would 11.30-13.50%. Loans above one crore are mostly against collaterals.

saikat.das@network18online.com