Rajesh Yadav, a 46-year-old driver in Mumbai, approached two non-banking financial companies (NBFCs) to take a loan of Rs 50,000 for his son to start a small business in his village in Bihar.

A month later, he decided against it as the interest rate he had to pay is 20%. He did not have the confidence that the business would generate 30% returns for his son to sustain in a neighbourhood where household incomes are low. 

Department of Financial Services Secretary M Nagaraju may have had images of people like Yadav when he urged senior executives of banks to lower interest rates on loans for small businesses. "I want to give a challenge to banks -- can we reduce borrowing costs for small businesses?" he said.

Nagaraju was referring to small borrowers such as maid servants, rickshaw pullers, drivers and night watchmen who were looking for loans to start businesses.   

“Banks lend to the poorest at higher rates of interest while corporates get loans at much cheaper price…even at 6% and 7%. The IBA (Indian Banks’ Association) and the bank CEOs should work on providing small business loans to borrowers at those lower rates than at between 9% and 11% presently prevalent,” Nagaraju said.

For India to transition to a developed country and to raise the per capita income of the poor, banks need to provide cheaper credit to the lower-income communities. Such small-ticket loans, however, should not be for consumption purposes but for setting up businesses, Nagaraju clarified.          

The gains at a societal level are obvious as more people get access to cheap credit. While credit penetration of banks would increase, borrowers from low-income groups would be encouraged to get into small businesses as their loan costs reduce.

Nagaraju said banks need not book losses on those portfolios while lowering the borrowing costs but the focus also should not be to make high profits on them.

Speaking at IBA’s 78th AGM in Mumbai, Nagaraju said public sector banks have been outpacing their private sector peers in lending to the MSME (micro, small and medium enterprises) sector. They should increase lending to small businesses as it is core to the Indian economy, he added.

Nagaraju also urged the public sector banks to lend more as they are sitting historically on low non-performing assets (NPAs), profits and declining slippage ratios. 

The credit to GDP ratio will have to hit 130% from the present level of under 60% in order to realise the goal of Viksit Bharat by 2047, he said.

State Bank of India chairman CS Setty, who also chairs the IBA, said at the same event that banks have been lending in the credit guarantee sectors at a competitive rate, but will need to look at ways of lowering costs for a broader spectrum of business loans outside these government schemes.

A way to lower the lending costs will be for banks to adopt more digital technologies as it is a cheaper route to reach the customers and assess proposals, Setty added.

Talking to Indianbankingnews.com, Swarup Kumar Saha, manging director and CEO at Punjab & Sind Bank, said that the lender will discuss with other state-owned banks on how to lower interest rates on business loans to small borrowers. 

“We are already associated with the government schemes where lower rates are being offered. About the other kind of small-ticket loans, we will be discussing with the IBA and work out on how this can be done,” he said.

For low-income earners like Yadav, the wait continues as they dream to set up small businesses and be entrepreneurs.