Credit where due

Costly domestic capital chokes industry,benefiting only foreign financiers

Written by The Indian Express | Published:October 17, 2012 3:27 am

Reserve Bank of India figures reveal that credit growth for the micro,small and medium enterprises from the banking sector slowed to 10 per cent for the last financial year. This growth rate is far slower than the rate of credit growth for all sectors. Which means that this omnibus sector,ranging from enterprises with a capital of Rs 5 lakh to those with Rs 10 crore,and employing most of India’s organised sector labour,is starving for capital. The data from the RBI also shows that 93 per cent of this sector does not have access to any bank finance. Since most of them cannot access the equity markets,borrowings remain their only option to raise finance.

The RBI analysis is also candid about the fact that for the miniscule section of small enterprises that gets bank finance,prime lending rates start at 16 per cent. In other words,they have to generate returns of at least 20 per cent or more to service their loans. With such a high cost of capital,it is obvious the units regularly make the choice to either bleed their labour or their capital instead of attempting a fresh loan,even when they want one. The way out is to either fall back on the moneylenders’ market to survive or tap the banks only for working capital needs. From both directions,the high cost of capital asphyxiates the sector. This is one of the reasons why the growth in the industrial sector has come down to a mere 0.4 per cent in the current fiscal.

Things are not particularly happy for the large corporates either. The lending rate for the best of them hovers between 9.75 and 10.5 per cent from the banks. The others borrow at over 11 per cent. No wonder most of India Inc is instead keen to tap the overseas market to keep its borrowing costs in control. For cash-rich companies like RIL,the borrowing cost is just 245 points above the US’s 5-year treasury papers — a huge spread. So despite a slowdown in the economy in this fiscal,external commercial borrowings continues apace,crossing $10 billion in four months of this year. The gainers are,of course,the arrangers for foreign loans,mostly foreign banks. Is it a coincidence that many of them have urged the RBI to hold its rates? The mid-term policy review on October 30 would be a good time to take a call.

For all the latest News Archive News, download Indian Express App

    Live Cricket Scores & Results