Country's largest lender State Bank of India has decided to waive guarantees and annual service fees on loans given to small and medium businesses, guaranteed under the Credit Guarantee Fund Trust scheme.

To improve credit flow to the SME sector, the government- appointed Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) acts as a guarantor for loans up to Rs 1 crore. CGTMSE charges the above-mentioned twin fees to borrowers.

"The fees are basically a kind of insurance premium. To help clients, we have now decided to pay up to the Trust from our books," SBI Managing Director (National Banking) A Krishna Kumar told PTI here. The decision was taken two weeks ago.

The Trust, which came into being four years ago, charges a guarantee fee ranging from 1 to 1.5% of the loan amount, while the annual service fee ranges from 0.50-0.75%.

Kumar parried a question on the financial implication of the move on the bank's balance sheet, but said this is a long- term arrangement, not a short-term move to lure customers.

Explaining the rationale, Kumar said the presence of such a commission clause dissuades "good borrowers", who feel it is unnecessary to take the extra burden in loan servicing.

Additionally, paying up the fees from the bank's own books will act as a "psychological deterrent" to the bank's staff, who can become complacent as the Trust stands guarantor to such loans, Kumar said.

If a loan turns bad, CGTMSE pays back 75% for the principal to the lending bank and an additional up to 15% depending on the case, he added.