Zoo Station

The SME sector in India has been a pet obsession of mine for years, and in fact is a key focus are of the BOP Learning Lab I have set up at the Indian School of Business. SME's are fundamentally the engines of a country's economy and well over 80% of the average country's job creation happens in the SME sector. Therefore, promotion of the sector is a key ingredient to sustainable economic growth. At the BOP Lab, we have identified a series of transactions costs that hold back the sector in India. To me, the key transaction cost is vis-a-vis access to finance, both debt and equity, but specifically equity. So, it took me by surprise to read this story in the Economic Times (therefore, need to take it with a pinch of salt). According to the story, U.S. banks are being encouraged to lend to Indian SME's.

The move comes at a time when India expects its trade with the US to double to $60 billion by 2009. US, which is India’s largest trading partner, accounted for 16.8% of the country’s exports and 6.3% imports in 2005. The first bank to come to Indian shores with an SME focus is New York-based M&T Bank. Its line of credit has US Exim Bank guarantee and does not require collateral — which most Indian banks insist on from SMEs. The other banks learnt to have partnered the US department of commerce’s trade promotion unit in this regard are AmSouth Bank, North Carolina-based Branch Banking & Trust Co, Atlanta-based Sun Trust Banks Inc and Bank of Oklahoma NA.
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This could be for anything from starting a hospital or a renewable energy project to setting up a golf course. “The cost of borrowing works out to 7-8% as per the Libor rate,” M&T Bank’s administrative vice-president Clement Miller told ET. This is competitive compared to 10-12% rate at which domestic banks finance SMEs, that too with collateral. The credit is classified as external commercial borrowing (ECB) and the borrower requires RBI permission to avail it.

“Around 95% of industrial units in the country are SMEs and 40% of the value addition in the manufacturing sector takes place in the segment. They are the largest job creators in the country. Still, many of them cannot access credit because of the requirement of collateral by many domestic banks. The initiative bridges the gap,” KDB Associates managing partner Sumant Batra told ET quoting a 2002 survey of the ministry of small scale industries.

As I said, since this is the ET, it is better to be prudent and wait until there is confirmation and some real lending that takes place. Nonetheless, a very important and positive move, if true. If any of you has additional information, please let me know.