India’s small businesses find credit in short supply after mega fraud

MUMBAI: When a US$2bil dollar fraud at state-run Punjab National Bank (PNB) rocked India two months ago, Chetan Hemani and other small business owners could have been forgiven for thinking “what’s that got to do with me?”

Confident of his good credit record and long relationship with his bank, Hemani, who is a pharmaceutical machinery manufacturer and exporter, had thought getting approval for a 25% overdraft above his 10,000,000 rupee (US$153,330) credit limit would be little more than a formality.

But when Canara Bank, another state-run lender, turned down his request in March, Hemani said he gleaned from conversations with bank officers that he was a collateral casualty in the fallout from India’s biggest banking scandal.

“It is suffocating,” Hemani said. “When influential people defraud a big bank like PNB and run away, there is nothing they can do. All they do is to squeeze retail borrowers.”

The banks’ increased rigour risks throttling one of the most vibrant parts of India’s economy – the micro, small and medium enterprises (MSME) sector that has been growing at 10% annually for several years, according to government figures.

It is also a segment that contributes almost 38% of India’s gross domestic product, employs some 100 million people, and accounts for 45% of India’s manufacturing output and 40% of its exports.

Two years ago, these vulnerable businesses were stung by Prime Minister Narendra Modi’s decision, with no forewarning, to take large denomination bank bills out of circulation overnight in a bid to flush out tax evaders.

They were hit again last year by the chaotic implementation of a nationwide goods and services tax, aimed at replacing various taxes and duties levied by different states.

Canara Bank said it had not changed policy as a result of the PNB fraud.

“We were quite careful in sectional advances, quite cautious earlier also (in extending loans) ... as such no effect” on loans extended to small businesses, said chief executive Rakesh Sharma.

But data for the sector as a whole does suggest there has been a tightening of credit.

PNB disclosed in mid-February it had been the victim of a massive fraud.

For the February to March period, lending to small businesses has fallen by 0.2%, though overall lending in the economy grew 5.9%. Lending to small businesses in the same period a year ago grew 5.8%.

At least three managers at branches focused on lending to small businesses all said that they have become much more stringent in disbursing loans after the PNB scandal.

“Everybody is cautious. We are following the exact rule book so that there’s no deviation,” said a branch manager of a state-owned bank who did not wish to be named.