The Reserve Bank of India (RBI) reportedly emphasized to commercial banks at the recent annual review meeting of its standing advisory committee on micro- and small-sized enterprise (MSE) that MSE lending should grow at a rate similar to that of overall bank credit growth, which recently has been approximately 20 percent per year. Mr K R Kamath, Punjab National Bank chairman and managing director, noted during the meeting that the number of accounts tied to MSE financing should grow by 10 percent every year.
Banks point out that a possible concern for increasing MSE lending is the negative impact on borrowers’ capacity to repay if interest rates continue to rise along with inflation. RBI has increased interest rates 10 times in the last 15 months reportedly in an attempt to curb rising inflation, all of which are believed to have strained MSEs. Mr D L Rawal, chairman and managing director of Dena Bank, said, “As of now, there are no concerns on asset quality in the sector but if interest rates keep increasing there could be some non-performing assets across sectors going ahead.” According to Business Standard, an Indian English-language daily newspaper, while overall bank credit growth of 20 percent has been greater than RBI’s projection, MSE lending grew by 13 percent in May, reflecting a decrease from a 15 percent growth in the same month in the prior year.
By Carol Kim, Research Associate
About the Reserve Bank of India (RBI): Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD, RBI reduced its stake in NABARD from 72.5 percent to 1 percent in October 2010.
Sources and Additional Resources:
Business Standard: “Banks asked to up credit flow to SMEs”, July 2011, http://www.business-standard.com/india/news/banks-asked-tocredit-flow-to-smes/441674/
India Today: “Life in the Slow Lane: Rising Interest Rates, Inflation Threaten India’s Growth”, http://indiatoday.intoday.in/site/story/rising-interest-rates-inflation-threatens-india-growth/1/141849.html
MicroCapital.org: “MICROCAPITAL BRIEF: Indian Microfinance Institutions (MFIs) May Become Business Correspondents (BCs) for Commercial Banks”, July 7, 2011, https://www.microcapital.org/microcapital-brief-indian-microfinance-institutions-mfis-may-become-business-correspondents-bcs-for-commercial-banks/
MicroCapital.org: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) to Allow Urban Cooperative Banks to Lend to Self-Help Groups (SHGs), Joint Liability Groups (JLGs) in Effort to Increase Microfinance Activities”, June 10, 2011, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-to-allow-urban-cooperative-banks-to-lend-to-self-help-groups-shgs-joint-liability-groups-jlgs-in-effort-to-increase-microfinance-activities/
MicroCapital’s Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/
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