Banks, saddled with rising bad debt in view of the economic slowdown, are believed to be directing a major chunk of their lending to large companies, choking credit to the small and medium enterprises (SMEs). This lending behaviour has come under the scrutiny of the parliamentary standing committee on finance, while the Reserve Bank of India (RBI) has also come down hard on banks charging high interest rates in lending to SMEs in comparison to those charged from big corporate borrowers.

In a closed-door meeting with select banks this week, the parliamentary committee headed by Yashwant Sinha asked them to furnish details of their exposure to large companies, SMEs, agriculture and other weaker sections. The committee will submit its report to Parliament after deliberations with RBI and other stakeholders like Ficci and CII, according to bankers present at the meeting.

The meeting was attended by banks, including State Bank of India, Canara Bank, Corporation Bank, Allahabad Bank, Union Bank of India and State Bank of Hyderabad.

According to an official present at the meeting, the committee found that bad loans were too high for most banks and that is forcing them to go slow in lending to SMEs. Also, no bank has a standard format for implementing the financial inclusion plan.

Meanwhile, PTI reported that RBI has asked banks to set up dedicated verticals to help SMEs deal with their finances and the country’s largest lender SBI has decided to waive guarantees and annual service fees on SME loans, guaranteed under the Credit Guarantee Fund Trust scheme.

"I will be happy if banks disclose this (high interest rates charged to SMEs) in the balance sheet,” PTI reported RBI deputy governor KC Chakrabarty telling a seminar organised here over the weekend by the SMEs Chamber of India.

The gross non-performing assets (bad debt) of most banks have crossed 3-4 per cent of gross advances which is a cause of concern,” said an official. Banks, in turn, have requested the committee to revisit the norms for classification of NPAs.

For example, if the interest repayment is delayed beyond 90 days, then it is classified as NPA and in infrastructure projects, if commencement and operation date is delayed by over two years, the account is classified as NPA even if the company continues make its payments on time.

A standard account if restructured twice becomes an NPA account. Banks are then forced to make provisions for all such NPAs. “The mandate for the committee is to find out how the capital within the banks is being put to use and if some changed in the norms for NPA provisioning is required so that banks have larger amounts to lend,” said a banker. The committee also discussed ways for the banks to manage their finances better and improve profitability. Banks, on their part, have said that the high interest rate regime and economic slowdown have put stress on the balance sheets of most companies, especially SMEs. Most of the bad debts are arising from telecom, steel, mining and SME sectors. Bad loans have been rising for PSU banks from the first quarter of this financial year.

The computerised system has thrown up many historical NPAs, resulting in a spurt in the bad loans. The total gross NPAs of the banking system is expected to cross 5 per cent of total advances by the end of the fourth quarter of this financial year. The outstanding bank credit by that time is expected to reach Rs 50 lakh crore. Meanwhile, PTI quoted SBI MD, national banking, A Krishna Kumar saying the decision to waive fees for SMEs was taken two weeks ago.

To improve credit flow to the SME sector, the government-appointed Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) acts as a guarantor for loans up to Rs 1 crore. CGTMSE charges the twin fees to borrowers.

To help clients, SBI has decided to pay up to the CGTMSE from its books. CGTMSE, which came into being four years ago, charges a guarantee fee ranging from 1 to 1.5 per cent of the loan amount, while the annual service fee ranges from 0.50-0.75 per cent.