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Rediff News  All News  » Business » RBI should direct banks to up credit flow to micro units

RBI should direct banks to up credit flow to micro units

May 04, 2009 17:15 IST

Pitching for norms for end use of bank credit, the Arjun Sengupta panel has said the RBI needs to direct banks to increase flow of funds to micro enterprises at reasonable rates as merely pumping in more liquidity in the system was not enough.

"Liquidity in itself will not solve the problem (faced by micro enterprises in getting credit) unless there are directive to banks on the end use of credit, in particular, more credit has to flow in favour of vast informal sector...," the National Commission for Enterprises in the Unorganised Sector said.

The NCEUS, headed by noted economist Arjun Sengupta, in its report on 'The Challenge of Employment in India - an Informal Economy Perspective' submitted to Prime Minister Manmohan Singh last week said the recent policy measures to tackle the impact of the global meltdown have not proved to be of much help to micro units.

There has been 31 per cent liquidity expansion of banks from Rs 34,67,098 crore (Rs 34,670.98 billion) in March 2007 to Rs 45,28,277 crore (Rs 45,282.77 billion) in November 2008 following the RBI's steps to tackle the crisis.

It said despite lowering of prime lending rate, banks have not fully passed on the benefit to the customers. Loans to micro and small units are available at a minimum of 16 per cent, almost double the rate offered to large industries.

"There is an urgent need to reorient banking system and its goals in general and credit policy in particular,"it said.

The increase in credit for small scale industries, including micro enterprises was just 9.7 per cent between August 2007 and August 2008 while those for credit cards rose by 86.3 per cent, services sectors by 35.3 per cent and the real estate sector by 46.3 per cent, NCEUS said.

It added despite the many committees and interventions in the realm of policy and institutional framework by the government, 'no perceptible improvement has taken place with regard to the credit flow to unorganised sector enterprises.'

"In fact, there has been a decline in credit flows to these sectors," NCEUS said.

While the recent stimulus packages announced by the government included a facility of Rs 7,000 crore (Rs 70 billion), for SIDBI to support incremental lending to micro, small and medium enterprises, no funds have been earmarked for micro enterprises, it said.

Micro units constitute over 98 per cent of all the enterprises in the country and contribute 31 per cent of the industrial output.

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