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Sunday, Jul 22, 2007
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Call to reduce interest for micro-finance loans

Staff Reporter

Official says banks reluctant to meet credit needs of MSMEs
Banks urged to provide loan of up to Rs.5 lakh without guarantee

THIRUVANANTHAPURAM: Secretary of the Union Ministry of Micro, Small and Medium Enterprises (MSME) Chandrapal has said that the banks must evolve some mechanism to reduce the interest rates of the loans in the micro-finance sector.

Addressing a press conference here on Friday, Dr. Chandrapal said at present the self help groups (SHGs), which were starting units under the micro-finance sector, were being charged about 30 per cent interest for the loan they were availing.

Even though the banks themselves were not charging such high interest rates, the SHGs were being finally forced to pay such high interest rates in the name of administrative costs levied by intermediaries and the banks. Ironically, this was happening when the big business groups were getting loans from the banks at much lower interest rates, Dr. Chandrapal said.

Pointing out constraints in the availability of adequate and timely credit was a major impediment in the development of the MSME sector in the country, Dr. Chandrapal said the Centre had already announced a policy package for stepping up credit to MSMEs with a view to double the credit flow to the sector within the next five years.

“While this package will address several issues, there is need to eliminate inadequacies in credit delivery to MSMEs. Commercial banks are reluctant to meet the credit needs of the sector on account of the perceptions of high risks and higher transaction cost of dealing with a large number of borrowers. Non-adherence of Reserve Bank of India (RBI) guidelines by the banks, particularly with respect to collateral was well known,” he said.

“These inadequacies need to be addressed by expansion of credit guarantee schemes at a faster pace and by launching programmes for sensitisation of the managers and staff of the commercial banks. We will also take measures to promote credit rating which will help MSMEs to access finance easily at cheaper rates. The banks must provide loan up to at least Rs.5 lakhs without collateral guarantee. Efforts are on to convince the RBI and the banks to ensure this,” Dr Chandrapal said.

He said his Ministry was also emphasising on the cluster-based approach to financing MSMEs, as it offered considerable possibilities of reduction of transaction costs and mitigation of risks.

Pointing out that MSMEs are making significant contributions to the GDP and to the employment generation efforts, Dr. Chandrapal said they should be provided adequate space in the Special Economic Zones (SEZs). This would enable the MSMEs to enjoy the various incentives available to the units in the SEZs.

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