 "SME lending helps banks diversify credit risk and avoid regional imbalances: M Narendra")
Indian Overseas Bank (IOB) is one of the largest public sector banks in the country with a total business of over Rs 3.89 lakh crore as of September 30, 2013. In an interview with T E Narasimhan, the bank's Chairman and Managing Director, M Narendra, says one of IOB's key growth drivers in the days to come will be small and medium enterprises (SMEs), and he expects advances to SMEs to go up from 12 per cent of the total currently to 15 per cent in a year's time. Edited excerpts:
How important are SMEs for banks like yours?
There are two ways to look at this - from the social and the business point of view. For inclusive growth in rural and semi-urban areas and to create employment opportunities, promoting SMEs is important. And it definitely makes business sense. In recent times, while banks' dependence on large corporates and infrastructure funding resulted in a mismatch of funds, MSMEs have provided better opportunities for working capital and short-term loans.
So, where is the divide between lenders and SMEs?
How many bankers are sensitised to the needs of SME clients is the key. Second, there is the paper work. In rural and semi-urban areas, since staff is limited, banks are not able to attend to requests quickly, and here technology can play a key role. Third, most entrepreneurs don't have the necessary financial statements. They will not be able to ascertain working capital requirements or future cash flows. And without paperwork banks may hesitate to sanction loans.
Banks also insist that SMEs should get rated. Won't that add to SMEs' costs?
SMEs which are rated by agencies like CRISIL, ICRA, Dun & Bradstreet and others get a reduction of 25-50 basis points in interest rate. Besides, 75 per cent of the rating fee is absorbed by the National Small Industries Corporation.
How is your SME business growing?
In 2011-12, our loans to SMEs rose by 40 per cent and in 2012-13 growth was around 35 per cent. Our exposure to this sector is now around Rs 24,000 crore and the target is to close FY14 with Rs 30,000 crore. Up to now there has been a slight slowness due to macroeconomic aspects, power cuts, drought and lower cash flows. All these led to lower appetite for credit. But the monsoon was good and the festival season is around the corner, and we hope to report 25-30 per cent growth compared to FY13.
SME credit accounts for only 12 per cent of your total advances. Are you happy with this?
There is a rule that every year, there should be 10 per cent increase in the number of accounts and minimum growth of 20 per cent in credit. We have been achieving both parameters. I want to increase the SME share to at least 15 per cent before the first half of the next fiscal.
How high are the NPAs in the SME sector?
Around 7-8 per cent, as compared to 3-4 per cent in other sectors like infrastructure and other major industries. But amount-wise, it is not huge. Besides, NPAs do not mean that everything is going to be written off. Most of them have assets, they can be revived. In any business there will be some defaults. NPAs in this sector are not alarming.
Will IOB look beyond lending, like consulting?
We are planning to start an advisory service for entrepreneurs on financial management and other business-related areas, including how to manage surplus funds. To start with, it may be free, but later, they may need to pay a small fee.
How important are SMEs for banks like yours?
There are two ways to look at this - from the social and the business point of view. For inclusive growth in rural and semi-urban areas and to create employment opportunities, promoting SMEs is important. And it definitely makes business sense. In recent times, while banks' dependence on large corporates and infrastructure funding resulted in a mismatch of funds, MSMEs have provided better opportunities for working capital and short-term loans.
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It also helps banks to diversify credit risk and avoid any regional imbalance in credit. Otherwise we tend to focus on select geographies, which has its own problems. When banks lend to medium and large enterprises, it is also important to take care of small entrepreneurs, since they act as suppliers. If the working capital requirements of this sector are not met, it is quite likely that medium and large enterprises will suffer.
So, where is the divide between lenders and SMEs?
How many bankers are sensitised to the needs of SME clients is the key. Second, there is the paper work. In rural and semi-urban areas, since staff is limited, banks are not able to attend to requests quickly, and here technology can play a key role. Third, most entrepreneurs don't have the necessary financial statements. They will not be able to ascertain working capital requirements or future cash flows. And without paperwork banks may hesitate to sanction loans.
Banks also insist that SMEs should get rated. Won't that add to SMEs' costs?
SMEs which are rated by agencies like CRISIL, ICRA, Dun & Bradstreet and others get a reduction of 25-50 basis points in interest rate. Besides, 75 per cent of the rating fee is absorbed by the National Small Industries Corporation.
How is your SME business growing?
In 2011-12, our loans to SMEs rose by 40 per cent and in 2012-13 growth was around 35 per cent. Our exposure to this sector is now around Rs 24,000 crore and the target is to close FY14 with Rs 30,000 crore. Up to now there has been a slight slowness due to macroeconomic aspects, power cuts, drought and lower cash flows. All these led to lower appetite for credit. But the monsoon was good and the festival season is around the corner, and we hope to report 25-30 per cent growth compared to FY13.
SME credit accounts for only 12 per cent of your total advances. Are you happy with this?
There is a rule that every year, there should be 10 per cent increase in the number of accounts and minimum growth of 20 per cent in credit. We have been achieving both parameters. I want to increase the SME share to at least 15 per cent before the first half of the next fiscal.
How high are the NPAs in the SME sector?
Around 7-8 per cent, as compared to 3-4 per cent in other sectors like infrastructure and other major industries. But amount-wise, it is not huge. Besides, NPAs do not mean that everything is going to be written off. Most of them have assets, they can be revived. In any business there will be some defaults. NPAs in this sector are not alarming.
Will IOB look beyond lending, like consulting?
We are planning to start an advisory service for entrepreneurs on financial management and other business-related areas, including how to manage surplus funds. To start with, it may be free, but later, they may need to pay a small fee.