Co-lending in SME sector helps banks check risk: SBI

The co-lending model is helping banks assess and mitigate risks associated with lending to small and medium enterprises (SMEs), State Bank of India (SBI) chairman Dinesh Kumar Khara said on Tuesday. SMEs need funding at present as they will lead the recovery post-Covid, he added, speaking at an event organised by the Confederation of Indian Industry (CII). Khara also observed that money from the domestic market and household savings was not sufficient to fund India’s infrastructure growth and the only way forward was to open up the capital markets further to foreign capital.

“The financing of SMEs in today’s context is more of a clarion call. If at all employment has to be generated in this economy, the mainstay of the post-Covid recovery is going to be SME. For that, as the largest lender, we are certainly concerned about how to ensure that the process of recovery begins and it’s on the right track,” Khara said. One way of doing this is the co-lending model, which helps banks get insights into customer behaviour with the help of analytics.

At the same time, weaker firms must bring in more equity in order to access bank funding. “Of course, those who are lower down the curve will have to strengthen themselves financially, more equity has to be brought in,” Khara said, adding, “Going forward, all markets, whether it is NBFCs (non-banking financial companies), banking or microfinance, are very cognisant of the risk and how to manage it.”

Khara said for India to kick-start sizeable infrastructure investments, the capital markets must be opened up to allow and encourage the inflow of more foreign capital. Many steps have been taken in the recent past to shore up the interest levels of foreign capital in the Indian economy. “May be the data and financial reporting, which is one of the critical components for shoring up the confidence of international investors, has improved significantly. But, I think this is only the beginning,” the chairman said. He added that India must do more to accelerate the pace of improvements in areas like reporting and corporate governance. Money with insurance and pension funds must also flow into infrastructure financing, he said.

Even if a development finance institution (DFI) is set up, there will be no room for it to access funds from the government or its agencies. It, too, would have to rely on international flows. “All this while, the domestic market and household savings were the major source of savings for the economy. With that kind of savings, the growth trajectory we have chalked out for ourselves may not be easy to accomplish,” Khara said.

The debt capital markets have a limited contribution to growth as the pool of participants there is very small. As a result, the yield curve that India has is not a representative one, said Khara. “Until and unless we have broad participation coming in both in terms of issuance and buyers, a more sustainable yield curve becomes a challenge,” he said. There was some activity soon after the Covid-19 outbreak, amid efforts by the government and the RBI to provide liquidity to all kinds of instruments. The number of issuers rose marginally as a result of those measures. Many corporates, who had never issued debt papers, did so when they saw that there was liquidity available for such papers.

“Probably with the commitment which people get from the market, we’ll get to see better traction. We as a financial institution would be very happy to see a yield curve developing and also broad-based participation because we see that the opportunity is huge,” Khara said.

He emphasised that SBI is in no position to freeze funding to some sectors of the economy on the sole grounds that they are ecologically unsustainable. Rather, the aim is to be carbon-neutral in a “transitioning economy”, Khara said. “So if at all we are financing like that (for water-guzzling rice cultivation in Punjab), we’ll also have to finance many green projects, which we are doing. Going forward, when we have alternate means available, we can go beyond neutrality and be in a position to reduce carbon emissions,” he said.