Co-operatives feel the heat as foreign banks woo SMEs

Cooperative banks are being fast robbed off their staple diet: lendings to small and medium enterprises (SMEs). Foreign banks such as Citibank, Standard Chartered Bank and HSBC are vying for a piece of the industry, which accounts for 30 per cent of the country's gross domestic product (GDP).

"Foreign banks are eating into our business as they try to lure SMEs with tailored products and cheaper funding," said a senior executive with Shamrao Vithal Cooperative Bank.

Till recently, SMEs were serviced by mostly cooperative banks, moneylenders and small finance companies. The segment had to contend with high borrowing costs, poor service and inefficient transaction facilities.

But not any more. Banks such as Citi have done well in funding transporters. Other foreign banks are eyeing hotels and restaurants in a bigger way.

This is not phenomenon isolated to India but a new global practice by banks. In the US, SMEs contribute 50 per cent to the GDP, according to McKinsey & Company.

Credit offtake is moving to SMEs by one means or the other, according to Hemant Pardikar, regional head, corporate banking, IDBI Bank. "In future, bank lending will be much less to large industries and much more to mid-market manufacturers and traders as well as retail lending," he said.

This follows corporates' abilities to access cheaper funds either through commercial borrowings or through money market in terms of debt. Alternatively, most are using their own funds owing to better working capital efficiency through falling inventories.

With a fall in demand for credit from corporates, SMEs have turned out to be banks' bread and butter, especially since many of the enterprises are able to leverage on corporate relationships to access cheaper funds.

"In the last one year, SMEs were able to access easy credit and liberal loans at 7.5 to 9.5 per cent. SMEs will see far more consolidation," Pardikar added.

Citibank has acknowledged that expansion of its reach in the SME market will power much of its growth in India. "Foreign banks have started targeting SMEs," stated a McKinsey official.

Not only have foreign and private banks started addressing this market, but even niche players such as GE Capital are filling in the gaps and capturing growth opportunities.

Banks are trying to address the services sector and they seek "quality of cash flows as a means to address the squeeze in margins", said a senior private bank official.

Some more progressive banks are going out to seek credit-worthy SME accounts, rather than wait to be approached, he added. Interestingly SMEs have shown resilience even in the crisis-struck Southeast Asia.