SBI shifts to cash-flow based approach for MSME loans up to Rs 5 crore

State Bank of India is looking to shift from collaterals to cash-flow-based lending for all loans to micro, small and medium enterprises (MSMEs) of up to Rs 5 crore, newly appointed chairman C.S. Setty said.

"Up to Rs 5 crore, we want to move from collateral-based lending to cash-flow based lending, backed by guarantee, which will give enough traction to the growth of micro enterprises to become small and small to become medium," Setty said at the Financing 3.0 Summit organized by the Confederation of Indian Industry (CII).

Setty pointed out that in addition to a lack of formalization, so far credit access to MSMEs has also been low due to the unavailability of the right skill sets to assess and lend to certain niche segments.

“Every type of financing requires different skills set,” Setty said, adding that lenders need to continuously innovate in terms of delivering credit, especially corporate credit in complex and emerging areas such as battery storage and hydrogen. 

“We run the largest project finance book in country today. Despite our years of experience, the skill set required to assess emerging areas is still lacking.”

SBI, on its part, is collaborating with multilateral development banks (MDBs) and some large MNC banks to resolve this, he said, adding that creation of such specialized verticals with universal banks is the need of the hour, not just for large corporate credit but also for lending to MSMEs. 

Reducing this credit friction will help reduce the challenges faced by MSMEs but not eliminate them, he said.

“Completely eliminating the friction by giving grants is not good for us. If you have a transition from collateral-based lending to cash-flow-driven credit, this transition requires a change in mindset for lenders. Before that mindset change happens, some sort of comfort from guarantees is required. This guarantee will help people to scale up," he said.

Way forward

Chief economic advisor V. Anantha Nageswaran said that corporates, both PSU and private, must take to invoice discounting on a much more massive scale than they have so far, because as working capital cycles improve it will also aid MSMEs access credit more easily.

“What we’ve seen happening in retail, needs to happen in SME and MSME now,” said Sanjiv Bajaj, chairman and managing director, Bajaj Finserv, adding that while the development of the digital stack is helping credit growth, the country needs to encourage the growth and entry of new banks and NBFCs.

Setty also highlighted the need to deepen India’s corporate bond market in order to improve credit access, for which domestic institutional investors such as mutual funds, pension funds and insurers would need to play a much bigger role.

“There is only so much commercial banks can do on corporate bonds, for the same reason that if we have an exposure to an NBFC, whichever form it is in, it will be under the Large Exposure Framework,” Setty said, adding that it is crucial for non-bank participants to come into corporate bonds and design products around it to aid capital coming back into the system.

Otherwise, persistent talk about how deposits are not growing in the banking system “is going to impact the credit growth”. 

"So credit growth will probably be driven by all the financial sector players, not banks alone,” he said.

(By arrangement with livemint.com)