Banks and financial institutions are gaining confidence in lending to micro, small and medium enterprises (MSMEs) because of formalisation, SBI chairman CS Setty said on Monday. Speaking at the Confederation of Indian Industry’s (CII) Finance Summit, he said for loans of up to Rs 5 crore, SBI is planning to move from collateral-based lending to cash flow-based lending, backed by the guarantee.
“While credit should have naturally flowed towards MSMEs and agriculture, it did not happen because conventionally these sectors were not too formalised and they had issues of credit absorption. This has dramatically changed post digitalisation and formalisation,” said Setty. “Formalisation and digitalisation have helped us to devise models to reach out to MSMEs which were not otherwise getting the formal credit.”
MSME need access to key resources such as credit, governance, technology, and market linkage to thrive, Setty said. “We at SBI believe that up to Rs 5 crore, we completely want to move from collateralised-based lending to cash flow-based lending, backed by guarantee. This will give enough traction to the growth of micro enterprises to become small and small to become medium enterprises.”
Emphasising the need to develop corporate bond market, Setty said it is essential for non-bank financial institutions, such as insurance companies, mutual funds and pension funds to participate in the corporate bond market to help channel more capital into the market. Addressing concerns about stagnant deposit growth in banks and its impact on credit expansion, he said credit growth should be driven by a diverse range of financial sector players, and not just banks.
The SBI chairman highlighted the need to develop skill sets within universal banks to handle credit to new sectors. “We need to continuously innovate in terms of delivering products. When it comes to the complex models of corporate financing, especially in the new emerging areas like battery storage, hydrogen, etc, they also require capital going forward.”
“While we expect much of the capital to come from overseas to support the domestic capital formation, universal banks, particularly large ones, are expected to play an important role in infrastructure financing,” Setty said.