Even before the Covid-19 outbreak, banks had started to move towards cash flow-based lending to micro, small and medium enterprises (MSMEs) and digital lending to individuals.
The banking system should not shift its focus entirely to retail lending as this segment, too, could suffer in a shrinking economy, State Bank of India (SBI) managing director Arijit Basu said on Wednesday. Even before the Covid-19 outbreak, banks had started to move towards cash flow-based lending to micro, small and medium enterprises (MSMEs) and digital lending to individuals. The pandemic has accelerated the trend, Basu said, speaking at an event organised by ET BFSI.
“My broad sense would be that this balance which has now come — at least for the larger banks, which have a certain mix of retail, wholesale, corporate, MSME, agriculture — would broadly remain the same. A complete shift to retail may not be in the best interests because if your economy doesn’t grow even your retail at some point of time would get impacted. That is my personal view,” Basu said.
Simultaneously, in each lending segment, some fine developments will take place, Basu said. For example, in MSME lending, cash flow budgeting will occupy centre stage. In retail, digital loans will become the norm. In agri-lending, too, most banks are taking the help of technological developments to understand the needs of farmers and how best they can be linked to the marketplace. “The banks will have to marry their own systems and processes to the ecosystem changes that are coming. The banks which do that better will succeed and continue to deliver good results, in terms of both being able to lend profitably and keep their balance sheets safe,” Basu said.
While banks are facing challenges amid an economic slowdown, they are still in a better place than before, having solved some legacy problems in the recent past. They have been cleaning up their balance sheets and these were much stronger as on March 31, compared to a few years earlier. They have revisited their existing processes, systems and credit underwriting. “Irrespective of Covid-19, one of the things we understood was that if we want to go out and lend for working capital, cash flow-based lending is much more seamless and much better to undertake than, maybe, the traditional balance sheet method,” the MD added.
He said even amid the slowdown that had been observed over the past two years, bankers had been hopeful of a pickup in FY21, accompanied by cleaner balance sheets. “But now that Covid-19 has hit us as on March 31, things have become even trickier. So what we need to do is assess the impact of what the pandemic has done to the book that we all carry, which are the sectors that have got impacted and, I think, each and every bank has actually done that,” he said.