At a time when most Indian and foreign banks are wary of lending to small and medium enterprises (SME) on asset quality concerns, Citi is increasing its exposure to this sector. In an interview with Somasroy Chakraborty, Rajat Madhok, managing director and head of commercial banking at Citi in India shares the bank's strategy for the SME sector in the country. Edited excerpts:
Q. Will you slowdown your lending to the SME sector in this uncertain environment?
A: We are not slowing down. In fact, I think compared to where we were last year, the number of customers that we bank with has grown. We are doing more business with our existing client base. Our asset book is strong. I will not say that these are not difficult times for this sector, but I believe we have a way to deal with them. We can manage the risk-return paradigm well even in difficult times.
Q. So, you are not worried with the credit quality of these loans?
A: When I think about our portfolio, there is not much concentration of non-performing assets. There is some stress on the operating margins of some of our clients who have large foreign currency exposures or linked to volatile commodity prices. But it is not specific to a certain sector.
Q. Are you suggesting your SME clients to adopt any particular hedging strategy to protect them from currency rate fluctuations?
A: The strategy is different for different companies and one cannot really use a broad brush across sectors. Companies who may be small in size but have been dealing and managing foreign currencies for a long time have the requisite expertise to manage risks relatively better. Owner driven organisations can use some professional assistance to help them manage their risks better. This is where a bank like us, which not only facilitate trade and provides financing but also offers foreign exchange risk management, can make a perceptible difference.
Q. What are the profiles of your SME clients? Which are the industries that you are lending?
A: For us commercial banking includes everything from managing current accounts of small enterprises in our branch to a mid-sized company that has a topline of Rs 2,500 crore. We focus on industries like specialty chemicals, health care, auto components, engineering, IT-ITES (information technology), materials and metals.
Q. Which are the industries where you are not lending?
A: In commercial banking we do not usually deal with long gestation or capital intensive sectors. We tend to stay away from sectors like infrastructure and real estate.
Q. Are your SME clients still borrowing since their business growths have slowed while interest costs have gone up in the past couple of years?
A: I think some of the better borrowers in small and mid-market segments still have access to reasonable interest rates. In the last few months we have certainly seen a slowdown in borrowings related to capital expenditure. But borrowings related to working capital have risen. This is a function of underlying commodities where dollar values have significantly increased. So, the working capital cycle is relatively longer and larger.
Q. Is overseas funding a viable option for Indian SMEs?
A: The SME or the mid-market segments are not yet looking at diversifying their sources of financing. They are not looking at moving away from banks to a different class of investors. It is still very much bank financed. The SME sector's need for foreign currency denominated working capital and term-loan is reasonably well met by the local banking system. Also, given the size of typical bond issuances, requirement of international credit ratings; most SMEs and MMEs will find the pricing for simple straight forward foreign currency loans more competitive.
