Business
Basel II norms to limit credit to SSIs: ICRIER

New Delhi, Aug. 13 (PTI): Implementation of Basel II norms by the banking sector will reduce credit availability to small scale industries (SSIs), besides adding to their cost of fund, says a study.

"Under the proposed Basel II norms, banks would be discouraged to lend to SSI that is not rated because a loan to an unrated entity will attract 100 per cent risk-weight," says an ICRIER working paper on 'Capital Adequacy Regime in India: An Overview.'

The Basel II norms, which seeks to tighten lending operations by banks, will come into force for banks having international operations by March 2008 and for others by March 2009.

The ICRIER analysis said following the Basel II implementation, "bank lending to this sector may further go down".

At present, SSIs, which accounts for 95 per cent of total industrial units in the country, 40 per cent of the industrial production and 35 per cent of exports, receive only 10 per cent of bank credit.

With the implementation of new norms, it would be mandatory for the SSI units to obtain credit rating before seeking bank loans. This, the paper said, would add to their cost of fund which is "bound to affect the economic viability of a large number of SSI units".

The government provides a subsidy of 75 per cent of rating fees as an incentive to SMEs which get a credit rating. After deducting the subsidy, SEMs with annual turnover of Rs 50 lakh have to incur a cost of Rs 7,400-22,141 depending on the rating agency.

Without subsidy, the fee comes out to be Rs 29,600- 42,000. Four rating agencies -- CARE, CRISIL, ICRA and Fitch India -- are operating in this space.

The Government also launched SMEs Rating Agency (SMERA) in 2005 to promote credit rating of SMEs. SMERA is a joint venture of SIDBI, Dun and Bradstreet Information Services India, Credit information Bureau India and 16 major banks in the country.

"While introduction of credit rating may in long-term improve the accounting practices of SSIs, there is also a possibility that SMEs will continue to rely on the existing system of informal credit as formal credit is likely to become more expensive due to the credit rating requirement of Basel II," the paper says.

According to Basel II norms, banks are required to maintain a capital adequacy ratio of nine per cent on an ongoing basis. Capital adequacy ratio is measured in Capital to Risk-weighted Asset Ratio (CRAR).

CRAR is the ratio of a bank's capital to its total risk- weighted assets. Financial regulators generally impose a capital adequacy norm on their banking and financial systems in order to provide for a buffer to absorb unforeseen losses due to risky investments.

Basel II norms, the paper says, will raise the cost for banks as they will need to take into account capital charges for operational risks in addition to credit and market risks.

Further, extensive data requirement, upgradation of technical infrastructure, capacity building and human resource development will translate into very high implementation cost, it adds.

Business

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