The Hindu Business Line : Private equity deals in SME segment on the rise

Mumbai, Nov. 22 Small and Medium Enterprises (SMEs), which are currently a favourite of banks due to the high growth potential and returns, are also being actively wooed by another set of investors.

This time, it is the private equity (PE) funds who are investing in SMEs.

Global and Indian PE funds are waiting to invest an estimated $5 billion into Indian SMEs, said Mr Vijay Chandok, Senior General Manager, Small and Medium Enterprises, ICICI Bank.

“The trickle started about two years ago and has accelerated in the last six to eight months,” he said.

The bank is considering about 30 deals for its SME clients from funds in countries like the US, West Asia and South East Asia, in addition to domestic funds. These deals are a mix of debt from the bank and equity from the PE funds. The bank has also created a special team within the SME vertical that looks at equity and advisory opportunities for SME clients. “At some stage the bank may even come out with a focused fund for SMEs,” Mr Chandok said.

A product that has gained popularity with SMEs is the unsecured credit or loan without collateral security, Mr Chandok said. It works like an overdraft facility and the upper limit is Rs 25 lakh. “This has opened up new business for us. We do charge a higher interest rate, in excess of 18 per cent, but it is still cheaper than the rates charged by the informal sector like moneylenders,” Mr Chandok pointed out.

unsecured credit growth

The proportion of such unsecured credit forms about 13 per cent of the total lending to the SME segment, he added.

ICICI Bank, which has one million SME clients, saw advances to this segment increase by 56 per cent to Rs 5,205 crore at September 30, 2007 against Rs 3,326 crore last year. The growth is expected to be strong this year as well, Mr Chandok said. The total SME portfolio of the bank, which includes assets and liabilities, is Rs 25,000 crore. This segment contributes about 12 per cent to the bank’s total fee income.

The bank defines SME as a business having a networth of Rs 50 core or less.

“Going ahead we see good growth in this segment because the SMEs themselves are coming of age. They are more professional, aware of opportunities and more transparent. There is a conscious attempt to become quality conscious and cost conscious,” Mr Chandok said.