PSU banks keen to step up SME sector lending

By Priya Nair / Shobha Kannan

Mumbai/Kolkata: Faced with falling margins due to rising interest rates, banks are focusing on the small and medium enterprises sector. Although lending to SMEs is slightly more risky compared with big corporates, with defaults ranging from 1-3 per cent, the higher returns make up for the defaults, said bankers.

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It is, as one banker said, the 'bread and butter' for banks.

An SME client is usually charged interest rates slightly higher than the benchmark prime-lending rate of banks. "While a 'AAA' rated corporate can get loans at PLR or even 1-1.5 per cent lower than PLR, lending to SME is usually never lower than PLR," said V.K. Dhingra, Executive Director, UCO Bank.

Besides earning a higher yield, banks also benefit from a host of ancillary businesses from an SME client, according to T.M. Bhasin, Executive Director, United Bank of India.

"Ancillary businesses such as Letter of Credits and guarantee from SME clients give banks an opportunity to earn fee-based income," he said.

Banks are also taking additional initiatives to increase lending to this segment. For instance, ICICI Bank is planning to launch a private equity fund for SMEs and State Bank of India has recruited dedicated customer relationship executives to serve SME customers and to acquire new business.

Union Bank of India is redesigning its SME segment into clusters, based on both geography and industry; setting up processing centres called 'SME Sarals' and hiring specialised credit officers for this segment. So far, the bank has set up seven SME Sarals and hired 280 officers.

United Bank of India is looking at a 40 per cent growth in its SME portfolio in 2008-09, up from 27 per cent last year.

UCO Bank is looking at 20 per cent growth, against 18 per cent last year. "Gems and jewellery, auto components, engineering and textiles are the sectors our bank will be focusing in a big way this year," said Dhingra.

Union Bank of India saw its SME segment grow by 41 per cent to Rs 12,630 crore, in the first quarter, up from Rs 8,962 crore last year. For this fiscal, the bank has set a target of Rs 17,000 crore or 35-37 per cent growth.

Bank of India, which had an SME portfolio of Rs 21,000 crore as on June 30, 2008, expects growth in this segment to be around 22-23 per cent, which is in line with earlier years, said S. C. Jain, General Manager, in charge of SME.

The lack of bargaining power with SMEs is also one of the reasons that banks would continue to focus on this segment.

"For SMEs there is no other capital available. They have to go in only for loan capital," said T. S. Krishnaswamy, Deputy General Manager, SME, SBI.

Given the overall economic slowdown, SBI is expecting its SME growth to see slight moderation, he added.

This year the bank is expecting the growth to be around 25-27 per cent, down from 31 per cent over the last three years.

The bank's outstanding SME advances as on June 30, 2008 were around Rs 90,000 crore.

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"SME is a segment of high growth. So our focus on this segment will remain. But because of the overall slowdown, new investments could be lesser this year," he said.

This year, engineering goods sector may be hit by the high steel prices and the food processing sector too may be affected due to sluggish monsoon and curbs on exports of pulses, he added.

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