Are SMES next bad loan area for banks?

Banks look to increase lending to the sector, but defaults also likely to rise

MUMBAI: At a time when one big company or another is hitting headlines daily due to loan defaults, there’s another segment that is beginning to show signs of stress.

Small and medium enterprises (SMES) are beginning to default on loans, signalling further trouble for banks already reeling under ₹5.8 lakh crore worth of non-performing assets.

Though the trend is in its initial stage, the impact of a default in the SME segment is likely to be large, since many banks are looking to double their SME loanbook. Small enterprises include businesses with investments of ₹25 lakh to ₹5 crore, and medium units are those with investments of up to ₹10 crore.

Lending to SMES has been considered to be a high-risk business for banks, since in such cases banks mostly lend to a balancesheet, and not to a promoter. But the sector is seeing growing interest mainly due to falling commodity prices (Most SMES are exporters, who benefit from a fall in commodity prices), and default by big businesses.

“Till now, you were seeing stress in large companies. Now you are seeing some of that reflect in SMES, although it is not significant,” said Dipak Gupta, joint MD, Kotak Bank.

For SMES, trouble also arises when large companies don’t get timely payments from their clients, which then leads to a liquidity squeeze down the chain.

HDFC Bank said last week that 40% of its bad loans are from SME businesses, while Axis Bank saw ₹306 crore and Kotak Mahindra Bank ₹200 crore worth of fresh slippages into bad loans.

According to Reserve Bank of India (RBI) data, lending to micro, and small and the medium enterprises by banks has seen negative growth at -6.5% and -12.7%, respectively, in May 2016, compared to the same period a year-ago.

“Our SME book stands at about ₹45,000 crore, accounting for 13% of our total loanbook…there is a slight increase in the risks in smaller SMES and (yes) little concern there (on the commodity front),” said Jairam Sridharan, chief financial officer, Axis Bank. “There is a mild increase in defaults in the first quarter (by SMES), but it is mostly a seasonality issue. There are pockets within which we need to be careful, but that’s across (all) sectors.”

State Bank of India recently launched ‘e-smart SME’ to provide working capital loans to e-commerce and technology startups, while HDFC Bank launched ‘SM@ bank’.

“About 40% of the increase in NPLS (non-performing loans) can be attributed to the SME segment,” said Paresh Suthankar, deputy MD, HDFC Bank. “However, I don’t think this is too sharp an increase, which will put us off it completely. We have seen a handful of names that have crossed over this quarter. It happens every now and then. The way the economy is panning out, this is a segment that will see ups and down. Hence, we will continue to grow in a cautious manner. SME is always a risk-reward play off.”

HDFC Bank plans to double its SME lending book in the next four years. Its SME loan portfolio currently stands at ₹70,000 crore, accounting for 18% of its total loanbook. The bank, which holds 7% of the total SME lending marketshare, is expecting it to grow at 30% every year.

Earlier this month, GK Kansal, chief general manager, SME business, SBI said: “By going digital, we have more history (data) of borrowers, details of vendors and dealers. So the risk is mitigated to that extent.”

SBI currently offers financing to over one million SMES, with a portfolio of ₹1.90 lakh crore.

The MSME sector contributes 38% to India’s gross domestic product (GDP), and employs around 80 million people.