Contributed By Pradeep Kumar

I read a very interesting article which will have far reaching effects on the Indian SME industry. You can find the article here. In a nut shell its about US banks coming forward to offer credit to Indian SME’s without a collateral and at 7-8% interest.

The major problem which Indian SME’s face today is that of non availability of credit. Indian banks ask for a collateral which most of the SME’s cant provide and even if they provide a collateral, the interest rates are in the 10-12 % orbit. So, the entry of US banks is obviously a great news for the Indian SME’s.

But there are a few pertinent questions to be answered. This article to a considerable extent indicates the importance to read the fine print.

The first question we need to ask is WHY?

Why should a US bank offer us credit, that too without collateral and at 7-8% rate.

The next question must be HOW. How can a US bank offer credit to Indian SME’s without collateral. We can safely assume that the US banks will know that a good percentage of the Non performing assets (i.e. basically money which was borrowed but not repaid) of the Indian Banks are in SSI’s/SME’s. (See page 6, exhibit 2 in this report.)

We will try to answer these questions. We will first answer the “HOW” and then the “WHY”.

US established a bank called EXIM Bank (export import bank) in 1934. One can find out more about this bank here.

To cut the long story short, they insure the loans given by the US banks to the SME’s in developing countries. So, the US bank does not face any risk. So, the HOW part is explained. This is the reason the US Banks dont need a collateral since the EXIM bank acts as the collateral. US banks also get a huge market like that of India for no risk.

Now we need to answer “WHY”. WHY should the Exim bank do this?

Please read the fine print in the article. An important condition of the credit offering is as follows.

“The US bank offers credit for importing capital goods, technology and services from US firms.”

i.e. the credit is offered only if the same is utilized to import capital goods/technology/services from US firms. And most probably a SME will import/partner with a Small business unit in US and hence the money goes back to the US economy to the SME’s of US and gives them more business.

So in short:

US bank offers credit to Indian SME’s -> EXIM insures money offered by US bank -> Indian SME purchases good/services from US firms -> US economy improves since wealth is distributed and the saturated US market sees growth -> In case Indian SME defaults Exim offers the money to the US bank -> Since the Indian SME gets technology from a high end nation such as US and also gets credit, risk of Indian SME closing down and hence defaulting is also reduced.

So this is a win win situation for Indian SME’s and for the US banks.

However the article from ET highlights how a seemingly innocent press release in the media may actually have a lot of meaning behind it!