Here's why private banks' SME credit has grown four times faster than PSBs'

Bankers say private lenders have more risk appetite, faster response times, and are aggressive on pricing

Private sector banks consistently clocked much higher growth rates in loans to micro, small and medium enterprise (MSME) than their public sector counterparts through financial year 2021-22 (FY22) and the first half of FY23. This was a period marked by the disruptions caused by the second wave of Covid-19 and the subsequent strong recovery.

According to the Reserve Bank of India’s (RBI’s) Financial Stability Report, released in December, while public sector banks (PSBs) reported a growth rate of around five per cent year-on-year (YoY) or lower, private banks expanded at a pace that was more than four times higher.

Explaining the divergence in growth, bankers said though the risk appetite and response times distinguished the two groups, other factors like pricing competition and use of digital tools also played a part. 

The demand for corporate credit was tepid and banks were sitting on fund surpluses through that period, but private banks were more aggressive in deploying funds. This push was visible in the largest private lenders like HDFC Bank and Axis Bank.

The growth was aided by tie-ups with fintech firms for loan origination for lending based on digital platforms. Besides, private lenders also used the government backed credit guarantee schemes to lend more to MSMEs.

Though PSBs lagged in terms of pace of growth, some large state-owned banks had also formed pacts with fintechs for SME lending that would provide a base for increasing the pace of growth. The impact of these moves would be visible in two-three quarters, bankers said.

Course correction was underway at PSBs, especially on improving response time for assessment and approvals. AS Rajeev, managing director and chief executive officer of Bank of Maharashtra, said PSBs, including his bank, were taking to digital platforms and straight through processing (STP) for loans to MSMEs. This is expected to reduce time for decisions and improve borrower’s assessment, he said. The finance ministry is pushing PSBs on EASE reforms and use of STP to meet credit needs of MSMEs in time.

When banks had huge surpluses, some private lenders offered sops like lower interest rates to win over the cream of MSME clients of state-owned banks, said a top PSB executive. Admitting to such instances of “takeovers”, one private banker said this was seen more in FY22.

The head of SME credit at a Mumbai-based PSB said private lenders were also more active in providing unsecured credit to small units. Quick decisions and use of various profile parameters for assessment in taking decisions gave them the edge, the executive said. Of course, this came with higher pricing to address credit risks.

In contrast, PSBs were more cautious in taking unsecured exposures. Their emphasis was on collateral-backed credit and on loans carrying sovereign support or guarantees.

To address this, Bank of Baroda is understood to be creating a business model with thorough underwriting to disburse low-ticket unsecured credit to SMEs, a PSB executive said.

MSME credit growth (YoY; %)

	March '21	Sept '21	Mar '22	Sept '22
Public	1.7%	3.0%	5.2%	5.6%
Private	22.4%	16.8%	22.4%	25.4%
All commercial Banks	10.4%	9.3%	13.2%	15.3%

Source: RBI