Cheap credit tap opens for SMEs

Galaxy Surfactants and Mool Denpro Private Ltd supply toothbrushes and toothpaste to Hindustan Lever Ltd.

A couple of months ago, both got working capital loans from leading private banks -- and had to pay an interest rate of just 6-6.50 per cent. Two years ago, this would have been impossible, says an HLL official.

Finance Minister Jaswant Singh's dream of easy bank credit for small manufacturers, retail traders and small and marginal farmers is actually taking shape.

Indeed, small and medium enterprises are getting loans at interest rates of 7.5-9 per cent, lower than the rates that even some medium-sized companies get.

With large blue chip companies no longer knocking on banks' doors, bankers today are lending against the receivables of SMEs.

SMEs are able to leverage their relationship with reputed companies to source low cost funds, either in the form of cash credit or a line of credit for bill discounting.

HLL's suppliers, for example, are going to banks and getting discounts on their receivables (that is, the money HLL owes them) at rates as low as the repo rate of 4.5 per cent plus 60 basis points.

Similarly, suppliers to Tata Motors are also able to discount their receivables at 5.75-6 per cent with many private sector and foreign banks.

Often, big companies are helping their suppliers to get inexpensive bank loans. "Corporates are trying to bring down the cost of inputs. They are thus helping to arrange bank credit for their suppliers to help reduce procurement costs," a senior corporate executive told Business Standard.

By discounting bills, banks gain too. They are able to earn more than the rate that they would get if they parked these funds at the Reserve Bank's repo window, as IDBI Bank regional head of corporate banking Hemant Pardikar points out.

With credit offtake in the conventional sense drying up as blue chip companies and large corporations fund themselves directly from the market, banks today are funding and offering credit to the entire supply chain, right from suppliers to dealers and retailers.

The only catch here is that companies need to have some stake in the SMEs. This is how most banks are reporting a higher credit offtake.

"Twenty per cent of corporate banking is supplier funding," says Pardikar.

Citibank, HDFC Bank, HSBC Bank, ICICI Bank, UTI Bank and IDBI Bank are active players in this segment.

The banks' willingness to lend to third parties does not lock up the credit line of companies such as HLL or Tata Motors, points out Centurion Bank executive director A Asokan. Bankers have dropped their earlier reservations about offering credit to small and medium traders.

"They have started looking at credit risks in an individual capacity and not as part of a particular sector or a group," said a senior bank analyst. Often, bank credit to these sectors is given irrespective of the corporate's rating, he adds.

Says a senior HLL executive: "Banks are lending at low cost to third party manufacturers (suppliers) on the basis of their order book position. However, we do not offer any guarantee to the banks on behalf of suppliers."

While banks still consider some medium-sized companies an unacceptable credit risk, smaller enterprises are getting easy credit and liberal loans.

Banks are offering them five-year loans for as little as 7.5-9.5 per cent, says Pardikar. This is just about 100 basis points more than what a double A-rated corporate gets when it raises funds directly from the market.

Rates offered to vendors by banks have become very competitive as a number of banks have entered the fray, notes ABN Amro working capital country head Rohit Karan Sawhney.

"The quality of different cash flows, which was not a discriminatory factor earlier for banks, is becoming the most important criteria for deciding the type, quantum and pricing of loans," says Pardikar. Banks pushing credit to these 'small' and numerous accounts will evolve more systematic means of doing so, he adds.

Companies and banks are working together to devise means to make dealers eligible for financing, based on their past transaction history and their ability to honour credit periods.

Companies offer first loss defaulter guarantees -- they bear the loss up to a specified amount should the dealer default, Pardikar says.