Banks say no to big borrowers, prefer small

Banks are stepping up lending to small and medium enterprises (SMEs), mid-corporates and retail borrowers while cutting exposure to large corporates.

The move is part of efforts to expand net interest margins (NIMs), say bankers. And a logical one, too.

According to them, large corporates have stronger bargaining power and are able to secure loans at lower rates, eroding the lenders’ margins, they point out, not to forget the risks associated with having too much exposure to a single large corporate entity.

NIM is the difference between the interest earned and interest paid by a bank expressed as a percentage of its total assets over a given period. Going by analysts, between April and December 2011, annualised NIMs of Indian banks moderated marginally to 2.94% compared with around 3.02% in the corresponding period a year ago.

“We have been growing our exposure in SMEs and mid-sized corporates for the last 2-3 months. Currently, 40% of our loan portfolio is to SMEs and mid-sized corporates and the remaining to large corporates. We would like to grow this 40% and bring down the share of large corporates,” said a senior Indian Overseas Bank official.

Bank of India has similar plans, said M S Raghavan, executive director. “We want to reduce the share of large corporates in our total business, which is about 48% now. We want to reduce it immediately by 2%.”

According to Raghavan, the focus on mid-corporates and SMEs is expected to improve his bank’s margins. “Our net interest margins domestically are 2.8% as on December 31. Now, we would like to take it to over 3%.”

On its part, private sector Yes Bank plans a similar move in the medium term, said Rajat Monga, group president- financial markets and chief financial officer, Yes Bank. “It is a natural process that once retail and SMEs start growing, the share of large and mid-sized corporate will start coming down,” he said.

Large corporates tend to take loans from a consortium of banks. If one bank is ready to give them loans at a lower rate of interest, they make that a benchmark and start negotiating with other banks in that consortium.

“This way, we lose out on margins. On an average, the large corporates, which enjoy higher ratings, take loans at interest rates 1-1.5% lower than those offered to SMEs and mid-sized corporates,” said the Indian Overseas Bank official.

What’s more, large corporates typically borrow over Rs100 crore. The flipside is that the repayment will be in trouble if there is a problem with the sector or sectors it operates in. “There is concentration risk when we have too much focus on a large corporate,” said Raghavan.

But aren’t there risks even with higher exposure to retail and SMEs?

“In retail and SMEs, we can earn higher interest, though there are higher operational and credit risks. Still, we will do that in order to diversify our portfolio,” said Monga.