Pent-up demand for funds, higher returns and easier recovery cited as positives

Banks are finding lending to the micro, small and medium enterprises (MSMEs) an attractive proposition due to higher returns and easy recovery.

Pent-up demand for funds from the MSME sector remains high and there is an opportunity for banks to accelerate growth in this segment, states a report by brokerage firm Motilal Oswal.

The risk is already embedded in the yields on loans and the risk-adjusted margins are higher in the SME segment than in the large corporate segment, the report states. Further, there is a huge opportunity to cross-sell, which would make the business proposition attractive.

Cluster-based strategy

Sanjay Agrawal, Senior President, Business Banking, YES Bank, said, “Most banks follow a branch-based strategy to tap MSME customers around the branches to disburse loans faster. This ensures low cost sourcing and an opportunity to scale up quickly. Our growth is a direct outcome of the cluster based growth strategy.”

According to an YES Bank report, the SME sector's contribution equals 40 per cent of India’s total exports and 8 per cent of GDP.

The report states that the RBI must ease the lending and NPA accounting norms for banks that lend to the MSME sector. Such a directive would have a positive impact on the morale of the MSMEs.

According to S.K.V. Srinivasan, Executive Director, IDBI Bank, “Despite slippages, the recoveries have been faster in the MSME sector due to easy information availability.”

Banks’ advances to the MSME sector grew by 7 per cent to Rs 4,58,270 crore as on July-end 2012 from Rs 4,27,530 crore in the year-ago period.

Way ahead

According to the Motilal Oswal report, the growth in bank credit to MSMEs, however, is not in line with that to large corporates.

The outstanding credit to large corporates stood at Rs 15,09,690 crore as on July-end 2012 against Rs 12,52,250 crore as on July-end 2011, an increase of 21 per cent. There are some concerns on credit demand from MSMEs given the slower growth in GDP and low industrial growth.

Moreover, high cost of funds and volatility in commodity, crude oil and currency prices are affecting credit demand, said the brokerage firm.

Says Abraham Chacko, Executive Director, Federal Bank: “If the economy has hiccups, large corporates suffer which also affects the smaller industries who are dependant on them.

“However, banks are shifting to MSME lending as they offer more collateral. Also, recovery is relatively easier. Therefore, NPAs should not hold back banks from stepping up lending to MSMEs,” said

Moreover, banks are now pushing for rating of the MSMEs. This should help banks in reducing delinquencies.

(This article was published on September 21, 2012)
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