Small is beautiful for some private banks

At a time when public sector banks are shunning not only large corporates due to rising bad loans, but also holding back lending to small and medium enterprises (SMEs), few private banks are gunning to fund SMEs.

In 2015-16, overall credit to micro and small enterprises fell about 2 per cent over the previous year.

Lending to medium enterprises fell a sharper 7.8 per cent. But few private banks have been aggressively lending to this segment, gaining market share through better service offerings and strong credit appraisal systems. HDFC Bank, for instance, has a market share of about 7 per cent in the SME lending space. In 2015-16, the bank’s SME loans (categorised under the business banking vertical) grew 34 per cent.

IndusInd Bank is another lender that has been able to report healthy growth in SME loans. In FY16, its SME loans, constituting 30 per cent of total advances, grew 30 per cent over the previous year.

“The healthy growth in SME credit has been achieved through systematic acquisition of new customers in chosen verticals and geographies. Analytics are deployed extensively to design offerings to our existing liability customers who are also business owners,” says Suhail Chander, Head – Corporate & Commercial Banking, IndusInd Bank.

For Federal Bank, SME loans, which account for more than a fourth of its total loans, grew 17 per cent over the previous year.

“SME lending has been steadily growing in the last couple of years as it is really the heartbeat of the bank and is a business that the bank understands. SME is a branch-led business and hence, we have been able to gain penetration in local markets where we have a strong presence,” says Shyam Srinivasan, Managing Director and CEO, Federal Bank.

SMEs offer large financing opportunity to banks and non-banking finance companies as more than three-fourths of their funding needs continue to be self-financed or met through informal sources.

“There is a lot of opportunity in the ₹2-5-crore ticket size for SME credit in every geography. Most importantly, in the relatively lower ticket size, the potential to work with the client on solutions beyond credit is the biggest opportunity — for instance, cash management, digitalisation, etc.,” says Shyam Srinivasan.

IndusInd Bank has been building its SME business across the spectrum through dedicated verticals. “We do not view all SMEs as one segment but a sum of three parts. The smallest is the emerging SME segment that requires very basic banking assistance. The mid-level SMEs have a slightly wider set of banking needs. The third category has grown to a level where they are at the cusp of becoming large corporates,” says IndusInd’s Suhail Chander.

Accepting the overall slackness in this space, Aseem Dhru, Group Head – Business Banking, HDFC Bank, says that most SMEs are big plays on the commodity front. “The top-line of SMEs has been flat and the working capital cycle has extended and hence, the overall requirement for additional funds has not been there,” he adds.

But what has led to robust growth for private banks is the waning market share of public sector banks in the SME space.

“Largely the shift in market share has happened from public sector banks to private banks. We, at HDFC Bank, for instance, are now offering credit to very small agri businesses like cattle, dairy, etc.,” says Aseem Dhru.

While managing risks within this segment has been a challenge, few banks have been able to assess and manage the risks better.

“Manufacturing and steel sectors are going through stress, but other local catchment businesses are doing well. We have separated origination and underwriting operation. So, credit quality is not influenced by the originator,” says the Federal Bank chief.

Aseem Dhru believes that the fundamental risk is different in both large corporates and SMEs. In the case of large corporate borrowers, the real pain has come from stalled large projects. “With SMEs, because the owner is personally involved, there are very few cases in which the balance sheet is overleveraged,” he adds.

At IndusInd Bank growth has been managed by larger footprint, better alignment and analytics. “It has not meant any loosening of credit screens and underwriting standards. Our risk teams are centralised and distinct from our business teams,” says Suhail Chander.

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