The Reserve Bank of India (RBI) is considering a proposal to provide easy credit to small and medium enterprises (SMEs) by setting aside 10% of the adjusted net banking credit (NBC) for them and dispensing with collateral security requirements for loans up to Rs 5lakh.

The move would help export-oriented SMEs, which are under pressure due to rupee appreciation. “It would act as a major fillip for small and medium scale industry as they are under constant pressure due to credit squeeze,” a senior government official said. According to sources in the government, the proposal is mooted by the ministry of SMEs.

Banks have also been advised to consider extending loans to SMEs at rate 2% cheaper than prime lending rate. The RBI data on credit flow to SME sector as at end of March, 2006 & 2007 reveals that advances to SMEs from public sector banks (PSBs) recorded a growth of 22 % and 27% during 2005-06 and 2006-07 respectively.

“The growth needs to be accelerated in a significant way. That is why the RBI and the government are actively working to increase the line of credit for SMEs,” a source said. RBI’s standing advisory committee chaired by the central bank’s deputy governor is expected to review the credit enhancement proposals for SME sector soon.

Public sector banks have been asked to follow a transparent rating system with the cost of credit linked to the credit rating of the enterprise and adoption of cluster based approach by banks for SME financing. “This is expected to have a favourable impact on the cost of credit to SMEs,” an official said.

Source : Economic Times