India offers new lending channel to small firms

A new bank announced in India's annual budget last week could boost loans and cut borrowing costs for the country's cash-starved small businesses - tailors, mechanics and phone booth operators, which account for about a fifth of the economy.

Mudra bank, to be set up with US$3.2 billion of capital to help microfinancing firms lend more, should help leverage up businesses that account for 40 per cent of India's exports, lenders and entrepreneurs say.

India's small businesses employ more than 106 million workers, according to government statistics.

Yet according to government estimates, only 4 per cent of the 57.7 million small business units in India have access to institutional finance, leaving many to rely on informal lenders. Experts estimate demand for loans from the sector outstrips supply by more than US$80 billion.

Rating agency Crisil estimates microfinance lenders have loan assets totalling US$5.6 billion. But they primarily target lending to individuals or groups of individuals among the poor. Even for the microfinance institutions that would like to lend more to businesses, rules cap the amount they can lend to a single borrower at 50,000 rupees (HK$6,200).

"The micro and small enterprises have been starved of credit," said Alok Prasad, the chief executive of Microfinance Institutions Network, a regulatory body for the sector.