The stress Kotak Mahindra Bank (KMB) has been experiencing in the small and medium enterprises (SMEs) segment is emerging largely from traders and businesses hit by demonetisation, Manish Kothari, business head – corporate banking and SME, KMB, tells Shritama Bose. The value of collateral has seen erosion in some of these cases, he added during the interview. Excerpts:
What has your experience in the SME space been in the last few months, both in terms of asset quality and growth?
A significant part of the market is still with the public-sector banks, and hence, we see a huge opportunity in the SMEs sector. It will remain an area of focus for us. There have been challenges over the last few years with respect to the quality of the book. We are taking the necessary steps towards course correction, and at the same time leveraging various growth opportunities.
The economic growth has been slow over the last two years because of various factors including demonetisation, which posed as a challenge for SMEs to grow. after GST and note ban, business in the SMEs sector is moving from the unorganised to the organised players. Organised customers are increasingly reaching out to banks to support their growth. We are seeing customers wanting to move out of their existing banks (largely PSBs which have been impacted in the last two-three years). Thus, the overall business opportunity is looking good.
Is the stress emerging because of any specific factors or from any particular size of businesses?
I don’t think that quality of a customer has necessarily got anything to do with size. It has got to do with the kind of people you deal with and the kind of business you deal with. Like we saw an impact for us in the trader segment and also in the quality/ valuation of collaterals becoming an issue at the time of liquidation. Traders who were dealing in products that were a little volatile, for example, commodities, have contributed to some stress. Similarly traders/businesses that dealt with customers who were subsequently selling ahead in cash were impacted by demonetisation. Otherwise, there is no specific pattern.
Any impact on the services side?
The impact was mainly on the manufacturing and trading side. In services, if at all there may be some one-offs. The segment overall is not as working capital-intensive. In the last few years, with the growth being moderate, the valuation of these (collateral) assets also took a beating. Also, as a collateral, industrial property isn’t easy to sell, as against a commercial or a residential property.
What kind of provisioning are you maintaining on the stressed SME portfolio?
We follow NPA provisioning norms as per the RBI policy and make the necessary provisions. Also, if collateral valuations fall, we increase provisions based on cover available. Some of the extra provisioning we saw this quarter was largely from the revaluation of the collateral. If the collateral is not going to fetch as much value, we treat the uncovered loan portion as unsecured and provide 100% for it.
What’s the plan for resolving the stressed SME piece?
When we believe the business is viable, we support the promoter. Accordingly, we evaluate the debt that fits in and get the customer to sell non-core assets. There has been a case where we have got the promoter to sell his house. The good part is that the promoter agreed. The other option would have been to sell assets piecemeal, where neither the bank nor the promoter would gain. There are a whole host of cases where the business is shut. Then you have no option. Even under liquidation, you get the best value when the promoter is cooperating. If not, you have to resolve it under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act). So, all three processes are currently at play.
Is the IBC route, as we have it now, at all viable for companies under Rs 50 crore?
IBC is a good law to have to get the promoters to work with you. If the promoter knows that they can lose their business, you are on a level-playing field with the promoter. The threat of being taken to NCLT works only for customers whose business is a going concern. In my view, NCLT is not a tested option yet for SME cases.
