The Hindu Business Line : Banks now target SMEs for growing asset portfolio

AS interest rates for corporate credit have touched rock bottom levels and fierce competition has emerged in the home-loan and personal-loan segments, several banks have begun to see small and medium enterprises as the hot destination to build their incremental asset portfolios.

"With the large corporates walking out of the banking sector into the debt market to meet their liquidity requirements, several banks have turned to SMEs for building their asset portfolios. This trend is going to be further reinforced with the capital requirements for lending to SMEs being pegged at half that for large corporates as per the Basel norms," Mr K.S. Harshan, Executive Director of Federal Bank, said.

The rates for SME loans are also considerably higher than those extended to corporates, leaving a handsome interest spread for banks. With their regional focus and strong client base among the local customers, smaller banks have been enjoying a greater share of SME credit disbursements.

Mr N.R. Achan, Chairman of Catholic Syrian Bank, said: "While the bigger banks are predominantly located at the major metros and towns, the smaller players have a greater presence in the smaller towns and semi-urban pockets. With the industrial momentum gaining strength, SMEs in smaller towns and semi-urban pockets have commenced to hum with activity. The smaller banks are well positioned to cater to their needs."

Banks such as South Indian Bank have already begun to focus on SMEs for building their asset base. While SMEs constitute just 15 per cent of its current credit portfolio, South Indian Bank plans to shore it up to 25 per cent in one year's time.

Dr V.A. Joseph, Chairman of South Indian Bank, said: "There are several advantages in lending to SMEs. Unlike the case of corporate customers, the risk is more evenly spread out among a large number of small and medium customers. Also the clients are from the same locality and the banker who clears the loan would know the enterprise and their promoters at a personal level."

But the bigger banks are not far behind . They have begun to appoint intermediaries to scout and identify business in their backyard, Mr Harshan said.

Some bankers said that fierce competition would emerge soon for SME loans, and both the rates and spreads would soon thin out.