Bank lending to small businesses grows at a slower pace

Bankers say the overall bank lending to SMEs will continue to be low till the overall economic environment improves

With the corporate sector slowing down, banks had been focusing on lending to small and medium enterprises (SMEs). However, the prolonged slowdown in the economy has led to slow growth in bank lending even for the SME business.

According to Reserve Bank of India (RBI) data, between May 30, 2014, and May 29, 2015, lending to micro and small industries grew at 9.6 per cent whereas in the same period a year ago, lending to the segment was growing at 23.8 per cent.

According to RBI guidelines, micro and small enterprises are those in which the loan size is up to Rs 5 crore.

Mohan K, assistant general manager, SME Business Department, Federal Bank, said the major reason for the slowdown was the downturn in the mid- and large-corporate segments. "Overall, the SME segment growth depends on the cash flows from the large- and mid-corporates. With the prolonged slowdown in the larger businesses the cash flows are impacted for the smaller businesses and as a result the banks are also cautious on over lending," he explained.

Bankers believe that the overall bank lending to SMEs will continue to be low till the overall economic environment improves. However, in the last year, several banks were looking at growing the portfolio as an alternative to growing their corporate books, but now the demand for credit has slowed down even from SMEs.

"The demand for bank lending from SME for the industry is also seeing some pressure and that is another reason why lending to this segment is now growing at a smaller pace," said Sanjay Agrawal, senior president (Business Banking) at YES Bank.

Moreover, with the bad loans in the segment once again showing an uptick. According to finance ministry data, non-performing assets in the micro, small and medium enterprise sector at the end of March 2015 increased to 6.39 per cent from 5.18 per cent in March 2014. Earlier, too, banks had burnt their fingers by lending to SMEs; hence they were adopting a more cautious and calibrated approach.

Another UBS report said, "While the banks do not disclose impaired loans for the corporate segment (including SME), our estimates indicate that corporate impaired loans as a percentage of corporate loan books have increased from 9.1 per cent (including SME) in March 2012 to 11.9 per cent in March 2015 for the SOE banks under our coverage (State Bank of India, Punjab National Bank and Bank of Baroda)."