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New age pvt banks not shy of SMEs

Poornima Mohandas

Private sector banks hope to learn from the bad experiences of the past and are betting on careful picking of customers, superior credit screens, strict adherence to stronger systems and processes and stringent monitoring of accounts.

Mumbai , July 31

NEW age private sector banks have boldly ventured into financing the typically `high risk, high delinquency' small and medium enterprises segment. But will they survive the potential NPA backlash? They seem confident.

Public sector banks that have long been involved in funding this sector have a quagmire of bad loans in their books. Private sector banks hope to learn from the bad experiences of the past and are betting on picking customers carefully, superior credit screens, strict adherence to stronger systems and processes and stringent monitoring of accounts to save themselves from the inherent perils of this market.

Banking analysts are of the view that the new entrants will not lend recklessly and do have good credit evaluation skillsDespite the lack of published or reliable information available on this segment and clients often having incomplete balance sheets, new age banks such as HDFC Bank, ICICI Bank and UTI Bank appear optimistic about this sector.

Said Mr Kaizad Bharucha, Head-Wholesale Credit & Market Risk, HDFC Bank, "We have adopted an internal rating system and assessed our risk appetite for this sector. We watch the transactions in the accounts of our customers and frequently call on them to keep a tab on their business.''

HDFC Bank, known to largely lend to top tier corporates as part of its corporate lending strategy, now also has a portfolio of SMEs of a couple of hundred crore one year after made its entry into the business. The bank's SME portfolio, — young and immature and therefore not indicative — has no significant NPAs as of now.

Internal rating systems of SME customers adopted by new age banks typically look at various parameters such as net worth, sales, promoter's investment, track record with other banks, potential and trends in the particular industry, significant strength over peers amongst many others. Banks also execute a periodic review of the customer's books and conduct an inventory check to see if cash withdrawals match inventory stock to avoid any diversion of money.

"ICICI Bank has been in the SME business since the last 3-4 years and has no significant NPAs in it. We lend to diverse sectors such as traders, gem and jewellery, pharmaceuticals, auto parts and even provision shopkeepers amongst others,'' said Mr V. Vaidyanathan, Senior General Manager, Retail Assets, ICICI Bank. The bank has about 1,300-1,500 customers in the segment and net NPA levels of 1.5-2.0 per cent. Despite the increased costs incurred on stringent monitoring of accounts, necessary in this sector, the upsides are many. Enumerating the advantages, said Mr Vaidyanathan, "These customers are extremely sticky, they contribute immensely to our fee income by availing of services such as letters of credit, bank guarantees, cash management services, overdraft facilities and so on. SME customers also bring in low cost deposits and tremendous cross-selling opportunities.''

However, another private sector bank, Global Trust Bank that entered the SME segment about eight years ago and has a portfolio of Rs 800 crore has not had a very favourable experience with their gross NPA ratio pegged as high as 7-8 per cent.

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