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Arti Sharma | March 20, 2004

For Mumbai-based Shamrao Vithal Co-operative Bank it was a jolt. In the space of a few months it lost six star clients.

Worse still, the bank found its prized customers had been poached by tough-to-match rivals like Citigroup, HDFC Bank and ICICI Bank.

Shamrao Vithal and other co-operatives had better get used to the new competition. The country's top private and foreign banks are chasing a new category of customer: small-and-medium enterprises.

Says Samir Bhatia, country head, corporate banking, HDFC Bank: "We were already handling their cash management business and realised we could expand that to offer them lending as well."

The country's top private and foreign banks are aggressively going after small-and-medium enterprises (SMEs) businesses.

HDFC's SME lending is more than Rs 2,500 crore (Rs billion) and it's growing at 50 per cent annually


UTI Bank has put together a three-member team to study product options in this segment.

StanChart has a team of 15 people and has turned aggressive in the SME sector during the last one year.

The big banks have, of course, always had small customers on their lending rolls. But now they are taking a more aggressive look at the sector than ever before.

Of course, it should be mentioned that their definition of an SME businessman is radically different from the definition used by co-ooperative banks like Shamrao Vithal. At Citibank, for instance, an SME can have a turnover of up to Rs 350 crore (Rs 3.50 billion).

Take a look at HDFC which has put together a 65-strong team focusing on SMEs. It now has a long list of between 1,500 and 2,000 clients and its SME lending now accounts for 14 per cent of the bank's total asset portfolio. That's more than Rs 2,500 crore (Rs 25 billion) and it's growing at 50 per cent annually.

HDFC isn't the only giant bank that's hoping to handhold the SMEs. Banks like HSBC, Standard Chartered Bank, ICICI Bank, Citibank and UTI Bank are all aggressively targeting smaller businessmen.

Take HSBC Bank, which is feeling its way forward in the new segment. It's in the process of setting up a separate team to handle SME lending. The bank is looking at SMEs with a turnover above Rs 90 crore (Rs 900 million) and it will focus firstly on exporters and importers.

Says Subir Mehra, senior manager, commercial banking, HSBC, "We have a large portfolio of SME customers who have their current accounts with us and going forward our focus is to develop the lending business."

Or, look at UTI Bank which has just put together a three-member team to study various product options in this segment.

Though it has only got off the starters blocks, it is targeting an asset book size of Rs 1,500 crore (Rs 15 billion) by year end which will translate to one-sixth of the bank's total lending.

It's a similar story at Standard Chartered Bank which has turned aggressive in the SME sector during the last one year. The bank has a team of 15 people and is targeting the retail and service sectors in a big way.

There are others like Citi and ICICI which have been targeting the SME sector for a much longer time. Citi, which turned its attention to the sector a long time ago, has an asset book of Rs 4,500 crore (Rs 45 billion) and a team of 500 servicing the SME sector.

Now, it has identified 20 industries as fast-growth sectors and is focusing its attention on them. Also, it's focusing on services like forex management options for the smaller players especially exporters and importers.

ICICI Bank is one of the oldest hands in the game of targeting the SME sector. It already does SME lending from 250 of its 450 branches in 220 cities.

"We found that the SME client is most comfortable banking at a branch," says V Vaidyanathan, senior general manager, retail banking, ICICI Bank. But they have also developed strong online banking solutions for the SME client.

What's prompting these high-flying bankers to go out in search of business in the SME sector? That's not tough to explain. Today 40 per cent of all industrial output is reckoned to come from the SMEs and they also account for 35 per cent of exports.

Naturally, the banks want to cash in quickly. Says Vaidyanathan: "We feel that this is a market that is well addressable and that we can invest in this business for building a profitable book."

Other factors are also at work. The country's industrial giants are finding newer ways to raise money and they are driving hard bargains.

Says HSBC's Mehra: "Traditional large borrowing customers are disintermediating the banks. So there is a serious liquidity overhang that banks like us need to address which we are doing through new avenues of lending."

Initially, the banks turned to retail lending to offset falling corporate credit offtake. Today, some bankers feel, that this segment has also become too crowded.

Says Ashok Kumar, president, credit, UTI Bank: "It means a disbursement of risk for the bank since retail lending is becoming too competitive."

Also the SME sector has changed in recent years. Says Gaurang Hattangdi, director, commercial banking group, Citigroup: "It's a factor of the maturing of the banking sector in India and increase in confidence with SMEs also that is making this segment attractive."

Obviously, that's not the only reason for the new interest in this sector. The bankers can squeeze higher interest rates from smaller borrowers.

Some banks like StanChart often charge around 300 basis points more for corporate loans to SME customers. Similarly, HDFC is usually around 150-200 basis points higher.

Besides that the banks are also looking at earning extra fees from other products and services being offered. In fact, ICICI Bank says that 10 per cent of its total fee income will come from this segment. ICICI says that SME lending will grow by 80 per cent this year.

Other banks are also looking forward to rich returns. Says Ashima Bhat, vice president, head, supply chain management, HDFC Bank: "The opportunity is in the size of the market, the margins, the fee income and the fact that banks can tap customers who are vendors to existing larger corporate clients thus diffusing the risk involved."

Adds Bhatia, "SME lending is not like retail lending where you sell a product and forget about the client. This is an ongoing relationship with the client across various segments."

The larger banks have huge advantages over rivals in the co-operative sector. Because they can raise money more cheaply, they can offer lower interest rates to SMEs than the co-operatives.

In the meantime, it is the co-operatives that are bearing the brunt of this aggression. They are banking heavily on years of experience to see them through.

"We have been lending to the SMEs for decades now, we know them and their needs very well," says S K Banerji, managing director, Saraswat Bank. Patil adds that while initially larger banks may poach customers due to lower interest rates eventually customers will come back since service levels will be better.

"We have a more personalised service and we're not in the business because other avenues have dried up. Larger banks will not be able to cater to them with the same amount of care," says Patil.

Still co-operatives are gearing up to co-exist with larger banks. They have ramped up technology to offer customers anywhere and any branch banking. So all Saraswat Bank's 75 branches and Shamrao Vithal's 38 branches are interconnected.

And Shamrao Vithal Bank is also getting into consortium financing, where, say an SME client needs a Rs 40 crore (Rs 400 million) loan and Citibank is only willing to offer the client part of that amount, the remaining amount will be funded by Shamrao Vithal. In the last six months the bank has worked out similar deals with HDFC Bank, ICICI Bank and Citibank.

The big question now, is whether this will turn into another battle to gain share. Currently, these banks are satisfying themselves by segmenting the market, products and poaching on co-operative bank clients.

Says Citi's Hattangdi, "At the end of the day, SME lending will boil down to relationship banking and which bank can create a strong link between the customer and itself to make him stay on for a long time."

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