Banks and SMEs have a close relationship in understanding and dealing with their finance requirements. But for SMEs to go on a next level, they need more services beyond credit from banks.
Avinash Chandra Jha, Executive Vice President – SME Banking Assets (Knowledge Banking Unit) Sales/ Strategy Alliance/ Ecosystem YES Bank, discusses with Venkatesh Iyer of TheSMEIndia.com, how banks and MSME can interact to develop a mutually beneficial ecosystem.
Jha stressed that SMEs/MSMEs need to use their bankers as debt or financial advisors to navigate the troubles of finance and business cycles. He also emphasised that SMEs should embrace digital technology as it benefits them in long term with better formalisation leading to better credit assessment for lenders.
Q. How are banks looking at MSME as a potential segment, in spite of so much push it still remains underserved?
It has improved significantly. We were in the single digits a few years ago, around 8% in 2015-2016, and now the Reserve Bank of India’s newest statistics shows lending has surpassed double digits for the first time.
This question can be answered into two parts: the world moves either from ‘One to Many’ or from ‘Many to One’. You will be able to identify good SME companies only if we do a deep dive into them. When it comes to good SMEs, it is a one-to-many situation for banks, and all of them work hard to lend to select SME companies. Banks pay attention to a small number of SMEs who take care of their work, the ecosystem, and their balance sheets and these SMEs are more open to paying taxes.
When it comes to SME loans, the preparation of a balance sheet from bottom to top is a major roadblock. You cannot build a net worth until you pay taxes, which are intermittently related which SMEs ignore.
The information asymmetry is the second source of concern. The SME must also consider if they are ‘One to Many’ or ‘Many to One’, if the answer is the former, there should be no problem; however, if the answer is the latter, there exists a problem.
Despite the fact that lending to SMEs is a priority sector for banks, many bankers have no idea what that priority sector is; training and development is languishing not only in the SME sector, but also in the banking sector; the challenge comes not only from SMEs, but also from banks; and for all of the above reasons, the 10% lending figures we discussed at the outset will take many years to reach 20%.
Q. How are banks promoting their loan offerings to SMEs?
During Covid times, the government made a great offer by providing 20% of the loaned money to SMEs. The banking industry was tenacious in its efforts, SMEs who availed the loan were treated with reverence. We also need to recognise that the government’s policy guidelines will face challenges from both lenders and SMEs perspective, but this can be promptly resolved from the SME’s by recognising which policies will be advantageous to them.
Q. What are the challenges in servicing loans to MSMEs?
There are two aspects to consider. The first is the supply chain, which includes the branches where the SME lending teams are located, and second when it comes to the lower stratum of SME, costing is still the second biggest issue. FinTech’s today are working on a timeline based on granularity and are very fast, but for a typical bank, the time taken will be more. Time, energy, and money are the three major costs for banks, but this is not the case for NBFCs and FinTech’s. Collectively if all the three come together the scenario can be better.
Q. Which industries are doing well? Where are the opportunities?
Food, pharmaceuticals, engineering, IT and ITES, specialty chemicals, polymers, and textiles are all doing better and are being explored by banks. Fintech and NBFCs are not sector-specific lenders since their reach is so broad, and they demand daily exponential loggings. In a few days, everything will be back to normal and we can see the hospitality industry also growing.
Q. Beyond credit, what other areas MSMEs are demanding services from banks?
Apart from manufacturing, SMEs now want to comprehend and learn about the ecosystem, which includes fintech, health tech, and other areas. We deal closely with industries as a bank, and one example that can be given is the Paint & Coating industry. The bank collaborated with technology or clean-tech companies to help the sector lower costs a few years ago when the industry was struggling under the weight of affluent treatment. Another cost is electricity, and we assist this industry in working on energy efficiency handling and financing.
The Pen and Stationery Association of India was upset by the increase in GST tax, on the one hand raw material costs have increased and on the other hand have to pay extra GST. We used our good offices to connect with the government and help them air their opinions. With such initiatives, we are aiming to improve the ecosystem as well.
Q. To what extent these platforms like Account Aggregator, Open Credit Enablement Network (OCEN), Trade Receivables Discounting System (TReDS) seem promising?
The path is clear, and it’s designed specifically for small and medium-sized businesses. Only SMEs are allowed to sell in TReDS. One to Many is a possibility, and platforms like these will benefit from it. In terms of OCEN, the ecosystem is bigger, with fintech and NBFCs collaborating to charter a new beginning.