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Last Updated : Jul 15, 2016 11:30 AM IST | Source: Moneycontrol.com

Longer payment cycle, not weak demand, hurting SMEs: HDFC Bank

With many large companies going in for an asset light model, the manufacturing work is subcontracted to SMEs. Trouble arises when the large companies don't get timely payments from their clients which then leads to a liquidity squeeze down the chain.

Rishma Kapur

Growth in small businesses has broadly been flat over the last two three years, because of differing business cycles, says Aseem Dhru, Country Head - Business Banking Commodity Finance, Rural & Agri Banking. But unlike large companies, small and medium enterprises are not suffering the hangover of too much debt on their books.

“We are not seeing an aggregate demand come off, but we are seeing working capital cycle slow down,” Dhru says in a free-wheeling chat with moneycontrol.com.

With many large companies going in for an asset light model, the manufacturing work is subcontracted to SMEs. Trouble arises when the large companies don't get timely payments from their clients, which then leads to a liquidity squeeze down the chain.

Dhru feels things should start looking up for SMEs hereon as they will now be able to reap the benefits of falling commodity prices and a pick-up in economic activity. While commodity prices have been down for a while, many small businesses have not been able to benefit from it immediately.

“When prices come down, your entire stock (inventory) gets priced down, but your borrowing cost does not,” he says referring to the recent fall in crude and steel prices. It is only after the high priced inventory has been cleared that the SME can begin to benefit from lower input prices.

Also, growth has been uneven. SMEs in services like healthcare, education, food processing and value add services are doing well. However, enterprises in segments which are rural-dependent, retailers in mobile, electronic goods garments and commodities continue to suffer.

SME is a high-risk business for banks in general.  “This is a business which has an element of risk as you are lending to a balance sheet, not lending to a promoter,” says Dhru. 

HDFC, which enjoys 7 percent market share in SMEs, is hopeful of doubling the share over the next four years. Because of high risk factor, bank seeks its customers rather than wait for credit applications.

“We are funding people who (already) have a relationship with the bank,” says Dhru. While the SME credit growth has contacted in the system, HDFC Bank has grown its SME lending business by 20 percent. At present, the SME loan book of around Rs 70,000 crore is roughly 15 percent of the overall loan book.

After retail, the bank is trying to transform SME borrowers experience by digitalizing the whole process. From cheque-less transaction to immediate credit, it is going all out to woo SME customers.

Dhruv says the idea is that SMEs should only focus on business and leave banking to banks. SMEs, especially in rural and semi-urban areas, hesitate to approach the banks for loans due to heavy paperwork and time lag.

Providing at home services not only reduces paperwork, but also speeds up the process for SMEs - a win-win situation for the customer as well as the bank.
First Published on Jul 14, 2016 04:41 pm