Western states for changes in MSME loan process

Most of the demands relate to agriculture and MSME sector.

States located on the western region of the country have asked the finance minister for a number of changes to the credit providing mechanism followed by public sector banks PSBs while providing loan to agriculture and micro,small and medium enterprises MSME. The demands have been made in the light of the recent review meeting of the banking sector for the western zone held by the finance minister in Mumbai last month.

Most of the demands relate to agriculture and MSME sector. The predominant ones being: increasing the interest subvention for crop loans and introducing interest subsidy for MSME loans up to Rs 10 lakh, a senior government official associated with the process said.

Rajasthan,for instance,has asked for an increase in the interest subvention for farmers so that the effective rate of interest on farm loans ranges between 2-5 per cent. The states have asked the government to set up a revolving fund in the beginning of the year so that claims under the scheme can be reimbursed in time. Currently,agricultural loans are provided at seven per cent under the interest subvention scheme of the government,which was extended by one more year in the Budget 2011-12.

States from the western region have asked the FM to consider including pledge loans as a component of crop loans so that farmers can avail subvention. Under the current system,crop loans do not cover pledge loans used for post harvest activities with the interest rates for the latter being as high as 10-12 per cent.

As far as MSMEs are concerned,states have said that the lending rate should not be more than the base rate of banks for loans up to Rs 10 lakh and an interest subsidy of at least 2 per cent should be extended to the sector. In addition,the time limit for repayment in the sector should be doubled to 180 days for MSME borrowers in the sector before classifying such loans as non-performing assets.

Gujarat and Maharashtra,where MSMEs are concentrated,have also asked for bringing the regional rural banks under the credit guarantee trust for MSME,which provides government guarantee to loans up to a certain amount to small entrepreneurs.

Gujarat also raised the issue of the declining credit-deposit ratio in the state with deposit growth over taking growth in advances in the past five years. To sort this problem the RBI has asked the state to evolve special schemes for areas with poor CD ratio so that banks can channelise credit to these channels. Gujarat also asked the Centre to issue licenses to banks which can focus on operations since no PSB has its operational head quarters in the state.