While large corporate are increasingly defaulting on loans taken from banks, small and medium companies are slowly coming up as a strong growth segment for traditional and new financial institutions.
A report released by credit bureau Cibil and MSME lender Sidbi revealed that the credit growth in the MSME sector is improving with the overall exposure reaching the highest level in over a year.
With the impacts of demonetisation and the GST waning, SMEs seem to be growing their turnovers and financial institutions are eager to lend a helping hand.
However, the same report suggests that this exposure could also potentially lead to an increase of non-performing assets (NPAs) for banks. On the International MSME Day, Economic Times Online speaks to Manish Kothari, Business Head (Corporates and SMEs) of Kotak Mahindra Bank to understand the trends in lending to SMEs.
Economic Times (ET): Many banks are now increasingly targeting the SME segment in search of growth. What are the reasons behind this trend?
Manish Kothari (MK): While demonetisation and GST had impacted SMEs, I believe over the last six to eight months, the companies are getting back on the growth trend. Small customers are now seeing growth in their turnovers and are now looking for support from the banks from the perspective of additional working capital.
Some of the initial teething problems in GST primarily faced by exporters have also been resolved to some extent. I am actually seeing far more buoyancy in the SME space. However, this buoyancy is more with those SMEs which are more organised. The organised businesses are definitely growing at the expense of those which are still possibly dealing in cash and therefore still largely unorganised.
The SME customers I have met in the past six to eight months are looking for support from the banks, both in terms of working capital requirements and measured investment for capacity enhancement.
ET: According to a TransUnion CIBIL analysis, public sector banks (PSBs) are losing ground in favour of private banks and NBFCs when it comes to lending to SMEs. Why do you think this is happening?
MK: My sense is that some of the PSBs are not really looking at enhancing their limits because of the PCA (Prompt Corrective Action) restrictions and therefore, more and more customers are moving to private banks.
ET: What steps are private banks like Kotak Mahindra taking to provide better services to SMEs?
MK: The question that private banks are asking is how we can provide better services to the SME segment. At Kotak, we are providing a lot of transaction banking services like cheque pick-ups and payment solutions which are digital in nature. The idea is to introduce services like CMS (cash management system), which till only a few years back were the preserve of large corporate clients. Today, we provide a whole host of tech-based solutions to SME customers, both on the collection and the payment side.
I believe dealing with private banks vis-a-vis PSBs is faster in terms of loan processing and private banks are in a better position to provide services which can enable SMEs into bringing efficiencies into their operations.
We do not think that the SME customers are not looking to adapt to technology, they just want it to be easy and need someone to handhold through the processes. Most of these SME customers do not have a very well organised finance department and usually it is the promoter who is driving the business and therefore, the business needs more support.
ET: Digital lending startups have made a place for themselves in the SME segment on the back of strong technological tools. Do you think banks can compete with their tech-based business models?
MK: In my view, both are here to stay. It is not like digital lending startups are doing exactly what the banks do or vice-versa. Digital lending startups are addressing this informal lending space and most of them do not necessarily engage in secured lending. They may be doing a lot of algorithm-based unsecured lending, which is not necessarily the market what banks are targeting.
As soon as you go down the chain, you will find a lot of SMEs which only get collateral based funding from sources like stock markets. Now, these fintech companies have enabled these SMEs to get loans without providing collaterals. There was possibly this large informal white space which is being addressed by these startups.
The fact is that a lot of these startups are financed by venture capital firms so even if they are making losses initially it does not matter to them. The risk-taking appetite of these VC-backed firms will be higher than what we do in a regulated business like banking. It is not just a question of competing but also how do you make it relevant to the customer as well as yourself, with respect to the element of cost, and risk and reward.
Having said that I feel that banks will also move in that direction, but it will be a slower move as compared to fintech startups. Most of the banks have now created their own data analytics teams which are now engaged in analysing customer data to evaluate the kinds of models that can be created to speed up the lending process.
However, collaborations will be the way to go. No bank can say that we will be able to innovate in all the spaces, so they need to collaborate with fintech startups. Banks have the customer data and fintech startups can work on creating algorithms to improve efficiencies. Some of the leading processes will also move to digital and both the entities will have to work together to come out with business models. It will not be an either/or kind of a situation.
ET: A joint study by Cibil and Sidbi suggests that loans to SMEs could lead to the creation of Rs 16,000 crore NPAs. How will these be handled?
MK: From Kotak’s perspective, we are comfortable with respect to the NPAs that we have. It is all about how you underwrite, monitor, and manage the business. Different banks will follow different methodologies. Everybody knows what is right, but it is more of a question of how you execute.
Small and mid-sized companies are growing and we are also growing reasonably well in this space. So, I would not like to say that we are seeing more of NPAs in this particular segment. There are enough good customers in the market and we see no reason for not going after them.
ET: What are the challenges that banks face in lending to SMEs?
MK: One of the biggest challenges with SME customers is getting the right information. We do not really know if we can go with the numbers provided to us by these companies. People are a little unorganised in this segment which creates problems while sizing up their requirements.
Also, if the business itself is organised, most of the times, their customers are not part of the organised set up, which is another challenge.
However, I see more and more SMEs coming into the organised set-up. Customers who are getting organised or are more organised vis-a-vis others are clearly seeing an increased inflow of business coming to them.
In FY 2018, some of the customers have shown a reasonable degree of growth in their turnovers. GST has also helped in reducing the administrative challenges of SMEs with respect to filing multiple taxes in multiple states.