Calcutta, July 2: The cost of borrowing from banks may go up for small and medium enterprises without a credit rating. Banks will have to set aside adequate capital to cover the risk associated with each lending following the implementation of Basel II norms.

Big companies with high credit rating have been able to get adequate working capital or term loans often at a sub-prime lending rate. But banks’ lending to SMEs has been low as the lenders perceive a higher risk in financing small and medium businesses than big companies.

Small units have little transparency in book keeping and no credit rating from a third party. Banks are also charging higher interest rates from the SME borrowers compared with big corporate clients.

The government has already announced a programme for small and medium enterprises offering them with a 75 per cent subsidy in costs for rating from a reputed agency.

The Small Industries Development Bank of India (Sidbi), the nodal bank to finance and develop the domestic SME sector, also promoted SME Rating Agency of India Ltd (Smera) in association with Dun & Bradstreet Information Services, Credit Information Bureau India Ltd and a few public sector banks.

While almost all banks have now tied up with Smera or some other credit rating agency such as Icra or Crisil and are offering a preferential lending rate to SMEs which have got themselves rated by any of these agencies, only a few small and medium enterprises are queuing up for a credit rating.

Formed in 2005, Smera has rated only about 600 SMEs out of 11.39 million in the country.

“Following the implementation of Basel II norms, we will have to provide for risk-weighted capital depending on the risk perception for each lending. Though we internally do our own risk assessment of a lender, a company that is already rated by an independent agency definitely enjoys an edge over others,” said K.C. Chakrabarty, chairman and managing director of Punjab National Bank.