INDIA FASTEST GROWING FREE MARKET DEMOCRACY FINANCIAL SERVICES. Indian banks discover appetite for rural, SME segments

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1 INDIA FASTEST GROWING FREE MARKET DEMOCRACY Indian banks discover appetite for rural, SME segments

2 PAGE 2 A number of banks are discovering that lending to Small and Medium Enterprises (SMEs) as well as farmers is profitable INDIAN BANKS DISCOVER APPETITE FOR RURAL, SME SEGMENTS Banks in India are casting aside shibboleths from the past and increasingly acquiring a global flavour. Some like ICICI Bank, State Bank of India and HDFC Bank already rival the best in the world in terms of technology and product offerings. Others are fine-tuning products and services to get there. India s banking industry currently is an interesting mix. While two-dozen odd state-owned banks are trying to leverage the enormous trust they have earned over decades, their private sector counterparts have brought in hitech banking tools to reel in customers. At the same time, foreign banks like HSBC, Citibank and Standard Chartered have been drawing the best out of their global experience. Even second and third tier banks are getting their acts together. Many large co-operative banks, which traditionally catered to small towns and small communities, are going in for an image-makeover from community relationships to modern banking. SME and farms: new focus areas In all this, a significant paradigm shift has gone largely unnoticed a number of banks are discovering that lending to Small and Medium Enterprises (SMEs) as well as farmers is profitable. In stark contrast, less than a decade ago, farmers and SMEs were both seen as unviable. Banks then reluctantly lent to both segments since they were forced to do so under the government-directed lending plans called priority sector loans. Now, in a complete reversal of that scenario, even foreign banks like Citibank are aggressively pushing loans to farmers and SMEs. Many banks are operating in rural areas voluntarily and banking norms have been made more efficient in line with improved agricultural practices. How has this come about? Consider the SME segment. Part of global supply chain Several changes over the last few years have made the segment profitable and therefore, bankable. The size and scale of India's SME sector is subject of guesswork, ranging from 7 percent of GDP up to 50 percent of GDP. Whatever the true size, there is no doubt that this sector is fuelling India's growth. Many Indian SMEs that have become part of the global supply chain have brought about a change in the attitude of bankers. New centres of global excellence are emerging across India. Karur in Tamil Nadu, for example, is fast turning into a new textile exports hub. Textile manufacturers in Karur are aiming to increase exports from the present US$ 345 million to US$ 1,150 million over the next five years. They are also exploring new markets such as South America and Africa. Some have even established small production facilities in China to bring down manufacturing costs. A textile park has been mooted for SMEs in Karur.

3 PAGE 3 As in the SME segment, the approach of banks is changing towards agriculture loans. Yes Bank, a new private bank, has tied up with Netherland s Wageningen University Research Centre to introduce Wageningen's Agrofood Park model in India. INDIAN BANKS DISCOVER APPETITE FOR RURAL, SME SEGMENTS Apart from Karur Vysya Bank and Lakshmi Vilas Bank, the two private banks headquartered in the town, several others are doing substantial business with the SMEs. Banks are now looking at selling financial products to the entire supply chain. Increasing customisation Equally significant, banks are discarding generic lending models in order to create customised products. HSBC Bank, for example, uses credit card receivables of businesses such as hotels, shops or travel agents as collateral. Flexibility is the order of the day. When Pratibha Industries, an SME firm focussed on infrastructure development, undertook a project to construct a cooling water transmission system for National Thermal Power Corporation (NTPC) at Kahalgaon in Bihar, ICICI Bank structured a unique product called back to back letter of credit that enabled the company to purchase raw material against the letter of credit. That isn t all. New tools such as third party ratings on SMEs have helped drive credit flow smoothly. SME Rating Agency of India Limited (SMERA), a joint initiative by Small Industries Development Bank of India (SIDBI), Dun & Bradstreet Information Services India Private Ltd (D&B), Credit Information Bureau India Ltd (CIBIL) and several leading banks, now offer SME ratings that are comprehensive, transparent and reliable. In other words, assessing borrowers credit worthiness in the SME segment is no longer a problem for bankers. Another reason for the growing attention is a realisation that those SMEs that survived the global downturn in the late nineties could soon be giants in the making, with improved efficiencies. As a result, foreign banks and new private banks are rewriting conventional tenets of risk aversion. Citibank, Standard Chartered and HSBC have already created special business units for SMEs, while their Indian counterparts like HDFC Bank and ICICI Bank have begun paying increased attention to the sector. Farming gets fresh lease of life An equally fascinating tale is unfolding in the farming segment. As in the SME segment, the approach of banks is changing towards agriculture loans. Consider this: Mumbai-headquartered Yes Bank, a new private bank, has tied up with Netherland s Wageningen University Research Centre to introduce Wageningen's Agrofood Park model in India. The model integrates high-tech agro production, processing and efficient, environment-friendly logistics. The chairmen of a number of Indian banks attended the MoU signing ceremony recently in Amsterdam as members of a combined Yes Bank-Indian

4 PAGE 4 The banks move towards rural and SME banking points to a need to find new markets as the corporate segment, which formed the main source of its earnings in the 2000s, is not as heavily dependent on bank funds now. INDIAN BANKS DISCOVER APPETITE FOR RURAL, SME SEGMENTS Banks Association. The group was visiting Amsterdam as a part of a delegation to study agri-financing. Banks are now keen to help farmers access state-of-the-art crop management practices as well as technologies across the agriculture value chain from cultivation to processing and marketing, says a senior banker who was part of the delegation. Yes Bank, for example, has decided to open a branch in Nashik in Maharashtra, and plans to develop products exclusively catering to vineyards that dominate Nashik s landscape. Viable farm lending Encouraged by this new interest, the central government is now talking about developing viable agriculture banking. The government-controlled apex bank for the farm sector, NABARD, had earlier launched a credit card scheme for farmers called Kisan Credit Card. After years of initial reluctance to sell the product, banks are now pushing this card aggressively. From about 600,000 cards issued six years ago when the scheme was introduced, the number has touched 4 billion in Not only is it easier to avail credit, it is also simple to operate. Farmers have been given sufficient freedom to decide how to use their credit. At the same time, a repayment schedule has been suggested. Sufficient checks have been put in place to make sure the scheme does not turn into a window dressing of bad loans made earlier. The banks move towards rural and SME banking points to a need to find new markets as the corporate segment, which formed the main source of its earnings in the 2000s, is not as heavily dependent on bank funds now. Some of India's biggest companies have steadily cut their dependence on bank loans. These firms have tightened working capital needs, used internal funds and borrowed abroad. At the same time, sectors such as IT and ITeS made huge profits without any help from banks. With this backdrop, it makes sense for banks to tap the SME and agriculture segments. Who s doing what Citibank, Standard Chartered and HSBC have created special business units for SMEs HSBC is using credit card receivables as collateral ICICI Bank is selectively structuring back to back Letters of Credit Bank of Rajasthan is targeting high-value SME clients Yes Bank has tied up with Netherland s Wageningen University Research Centre to introduce Wageningen's Agrofood Park model

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