Kotak Bank sees SME segment driving loan growth
Kotak Mahindra Bank is betting on the SME segment leading growth for the bank in particular and lenders in general in coming months and years, a senior official said.
“We are focusing on growing our SME franchise. We believe SME will be the growth engine for the country and Kotak Mahindra Bank wants to be a partner in their growth. This is likely to be our fastest growing segment,” Paritosh Kashyap, group president and head, wholesale banking group at Kotak Mahindra, told businessline in an interview.
The bank is betting on the pace of economic acceleration which is anticipated to reach to $7-8 trillion in the next six years from nearly $4 trillion as of now.
For lenders, the segment that will grow faster is the SME or mid-market segment, relative to larger corporates, which will advance at a slower pace. Within the segment, Kotak Mahindra wants to partner with these SMEs, which have high growth potential, so that it can grow alongside them.
“The strategy is about focusing on the segment with the greatest potential for growth, and as they grow, we will grow with them,” Kashyap said.
The Indian economy is expected to reach $7 trillion by 2031, and the SME segment is seen as the backbone of that growth. The SME segment drives about 30 per cent of the country’s GDP, according to various reports.
Kotak Bank aims to achieve its SME banking growth aspirations with customer service, product delivery, quick turn-around and convenience. The banks is saving on operational costs through greater digital adoption, using technology and data to streamline credit decision-making, ensuring processes are as digital and efficient as possible. It was able to reduce the turnaround time by a third compared to last year, measuring specifically for the SME segment.
The bank’s SME loan book accounts for 8 per cent of total advances but is the fastest growing, according to its results for the September quarter.
Kotak is also seeing higher loan demand to finance Infrastructure projects, particularly in areas like renewable energy and data centers. The infrastructure sector is experiencing strong demand considering the government’s focus on building infrastructure and relatively higher budgetary allocation, Kashyap said.
While demand for loans is one thing, Kashyap pointed out that Indian banks continue to face challenges from irrational loan pricing.
“On one hand, we have a high demand for credit from corporates, and every bank wants to grow their asset book. However, this demand for credit is creating significant pressure on interest rates, which in turn is shrinking NIMs for banks. As the cost of funds goes up, spreads are getting squeezed, which is reflected in the shrinking NIMs across the banking sector.
“For the last few years, credit environment has remained benign. Banks have not been pricing for any potential credit risks. The competition among banks to win corporate business is leading to a situation where we’re seeing irrational pricing,” he pointed out.
Indian banks are seeing strong credit demand in infrastructure projects especially in for new projects in energy and technology-related infrastructure are expanding. In the SME space, companies are opting for incremental capex rather than launching large new projects. This trend is more pronounced in traditional manufacturing industries compared to infrastructure, where there is significant new investments.
“Other than Infrastructure sector, we are not seeing significant new capex requirements. We are seeing more incremental capex for debottlenecking, forward and backward integration or marginal capacity enhancements. Greenfield large capex other than Infra are very few,” Kashyap said.
The growth in lending to large corporates has been relatively slower compared to the SME segment. The consortium lending segment has also stagnated, Kashyap said. Citing RBI data, Kashyap said that capacity utilization in Indian industry is around 76 per cent. Typically, when capacity utilization in industry touches between 72-76 per cent, that’s when companies start looking at new capex, he explained.
“The primary drivers of this growth are infrastructure and corporate transactions. The growth is also coming from sectors like real estate, NBFCs, logistics, data centers, roads, and renewable energy and is giving impetus to the downstream industries like cement, steel.”