In tune with Prime Minister Atal Bihari Vajpayee's recent promise, the government and Reserve Bank of India are all set to enhance credit flow to the small-scale sector and are likely to ask banks to extend loans at competitive prime lending rates.

Official sources told PTI in New Delhi that the measures were discussed at a meeting convened by RBI Deputy Governor Vepa Kamesam with representatives of SSI sector in Mumbai recently.

These would be discussed with Planning Commission after which formal directives would be issued by the RBI.

Prime Minister Atal Bihari Vajpayee had in his address at a global summit for SMEs recently, raised the issue of high cost of credit for the SSI and called for remedial measures.

The measures being considered include linking growth of deposits with banks directly with lending to the SSI sector as at present no sub-target has been fixed for SSI lending within the priority sector lending.

Another measure being considered is to ensure that interest on loans up to Rs 200,000 is given at the PLR, they said adding there was also an agreement that this limit could be enhanced in due course.

The meeting also agreed to enhance composite loan limit, which includes both working capital as well as term loans to Rs 3.5 million from Rs 2.5 million.

These measures are also being considered in the backdrop of a meeting convened by Deputy Chairman Planning Commission K C Pant with officials from finance ministry, SSI ministry, RBI and leading bankers last month to consider ways to address the problems of credit availability being faced by the SSI sector.

Though the flow of credit to the SSI sector has gone up considerably from Rs 25,843 crore (Rs 258.43 billion) in March, 1995, to Rs 49,743 crore (Rs 497.43 billion) in March 2002, the credit flow as a percentage of net bank credit has declined to 12.5 per cent in 2002 from 14.2 per cent in 2001.

Concern has also been raised on the delays in sanctioning of loans and credit and the slow progress of the Credit Linked Capital Subsidy Scheme for technological upgradation of the SSI sector.

Government is already considering a Delayed Payment Act in view of large number of cases of large units delaying payments due to SSI units, which in turn was responsible for the default in payment of bank loans by the smaller companies.

Overall, there are 73,00,000 defaulters of which a bulk 63,00,000 are from the SSI sector. In value terms, 19 per cent of the defaults of bank loans were from the SSI sector.

Another legislation on factoring services is also under consideration to facilitate payment of bank loans by SSIs.

The proposed Delayed Payment Act would seek to disallow Modvat credit on goods purchased from SSI if the payment is not made within a stipulated time.

The proposed factoring services act would enable banks to take over the assets of large units with outstanding dues to SSI units and pay 80 per cent of the dues amount upfront.