Private banks turn to SMEs to drive growth

India Inc’s reluctance to borrow money and emerging credit quality stress in retail segments such as commercial vehicle and commercial equipment finance have prompted private sector banks to turn to small and medium enterprises (SME) to drive their business growth.

“Growth in retail credit, especially in the high-profit segments like credit cards and auto loans, has tapered down. Also, increased competition in the home loan segment has forced private banks to guide for lower growth from retail going forward. We believe MSME (micro, small and medium enterprises) or business banking will spur the next leg of growth for private banks as capital constraints weigh down public sector banks,” Saikiran Pulavarthi, analyst with Espirito Santo Securities, said in a note to clients.

Bankers claim the quality of SME loan book has improved in recent years, with lenders following a strict credit appraisal process in an uncertain economic environment. In fact, a few of them even suggested that whatever stress that is seen in their business banking and SME loan portfolios relates to credit offered three or four years ago and does not pertain to recent advances to this segment.

Also, with the slowdown in large corporate loan disbursement, many lenders are now betting big on the SME segment.

“We want to be known as the SME bank of the country. The share of SME loans in our total advances has now improved to 25 per cent from 20 per cent a year earlier. We have seen good growth in this business and expect around 22 per cent rise in our SME advances in the current financial year,” Antu Joseph, head of SME, agri and financial inclusion businesses at Federal Bank, told Business Standard.

EXIM Bank of India expects to do around Rs 2,000-crore SME refinancing in 2013-14 (April-March), compared with Rs 685 crore last year.

“We realised that there is a gap in demand and supply of foreign currency loans for the SME exporters. If they opt for foreign currency loans, in the current environment it works out cheaper than rupee borrowing. We have set up a programme where we partner commercial banks and offer them foreign currency funds to on-lend to SMEs,” said Sudatta Mandal, general manager of EXIM Bank of India.

While state-run lenders still control a majority of the SME loan market share, industry analysts believe large private lenders such as HDFC Bank and Axis Bank have already stepped up efforts to accelerate growth in this business. “The MSME segment offers high growth potential and is performing well on the asset quality front... It is already one of the most profitable divisions for the likes of HDFC Bank and Axis Bank,” said Pulavarthi.

A few bankers, however, expressed caution. According to Mahesh Dayani, country head (retail assets) at ING Vysya Bank, lenders need to ensure that they do not have over exposure in this segment.

“It is a different business. While SMEs do have a corporate structure, most of them are still run as sole proprietorship or family-owned. Hence, bankers need to engage with the promoters. Also, it helps if lenders take advice from local experts who have knowledge about the business,” he said.

Currently, about a third of ING Vysya's loans are in the SME segment.