HDFC Bank has officially ventured into the small business loan segment. It will now be focusing on small business lending in addition to its core divisions. It has also officially launched a unique tool for credit appraisal based on analytics. This will be helping in sanctioning working capital loans within only one hour. The software will only require the statement of the primary bank account which will be closely assessed for the outflows and inflows. HDFC Bank is reportedly aiming for at least 30-50% of overall retail loans with ticket sizes lower than Rs. 5 crore to be driven by small business loans.
HDFC Bank has already been operational in spaces like instant personal loans within 10 seconds and digital sanctioning of loans for small businesses. It is now emphasizing on the provision of working capital and this will not be restricted to just internal customers at the bank. Instead of requiring 5-7 days, HDFC Bank will be taking only three hours for sanctioning these loans up to Rs. 5 crore as per reports. HDFC Bank has reportedly tested the product already, having launched it as a pilot sometime earlier.
It has also disbursed close to Rs. 1,200 crore over the last year or so according to reports and is now eyeing monthly loan disbursals close to Rs. 400 crore. There has to be sizable risk management mechanisms in place for analysing self-employed customers through their bank statements along with highly advanced technological analytics and the capabilities for iterated learning solutions via intelligence at the company’s back-end. It has reportedly enabled this to make an extensive analysis possible for the profit and loss statements of businesses and their balance sheets along with timelines.
Primary relationships in the banking sector offer a higher level of accuracy for businesses assessment as compared to multiple documents as per the bank. For making the entire procedure swifter, relationship managers at HDFC Bank will be possessing computers linked to the bank and PDF documents will be uploaded for back-end analysis. The targeted category includes businesses with turnover between Rs. 7-10 crore. HDFC Bank has already disbursed loans to manufacturers of steel and iron, traders in ready-made garments, other traders and those dealing in agri-commodities.
In case of working capital, there is collateral of course yet funding takes place on the basis of the inventory cycle of a business and hence assessment is not done on the basis of collateral. HDFC Bank is forecasting 30-50% of its retail SME loans to come from this new product. This will help the bank get more customers into the banking mainstream through products like bill-pay, deposits, HDFC Bank wallet and mobile banking among others. As a result, this new foray will help get more primary banking customers on-board as well according to the bank.
Why HDFC Bank is focusing on small businesses
HDFC Bank wishes to cater to customers who are turned down elsewhere. Other financial institutions are now adopting a more conservative approach towards lending to MSMEs in the current scenario but HDFC Bank is emphasizing on scaling up disbursals for these companies in a bid to scale up overall profitability in the bargain. These are companies with annual turnovers going up to Rs. 10 crore and within only 12 months, Rs. 1,200 crore has been disbursed by the bank already to borrowers in this sector.
The average loan ticket size in this segment is roughly between Rs. 35-60 lakhs and HDFC Bank offers approvals for loans in only 3 hours as opposed to 3-5 days on an average. This product has been targeted exclusively for MSMEs and seeks to offer greater convenience and hassle-free experiences in availing of necessary working capital loans. HDFC Bank is eyeing immense future potential for growth through higher credit availability in several segments in this sector. HDFC Bank is now expecting disbursals of roughly Rs. 400 crore on a monthly basis as per reports and smaller companies are naturally the target audience since they contribute in excess of 3/4ths of the employment generation in the country although their credit share in total outstanding loans is less than even 20%. NBFCs at this juncture are mostly going slow on loans as well since there is a liquidity crunch in the market.
As a result, HDFC Bank is eyeing this as a major growth avenue and loans to MSMEs also help in earning a minimum of 100 basis points more as compared to other loans in the retail category. Operational expenses will also be slashed greatly through the usage of analytics for credit assessments and HDFC Bank will be able to lower overall costs since loan appraisal procedures based on algorithms will require little to no intervention from humans.
Overall lending figures for HDFC Bank touched Rs. 7.89 lakh crore in the quarter between October and December 2018, indicating a rise of 23.8%. Fast working capital loans will help HDFC Bank ramp up overall growth and profitability in the long term as per reports. Small businesses only need to have the latest audited profit and loss account statement ready along with the summary of the balance sheet, bank statements for the last 6 months and the application form. Analytics based on algorithms, enable analysis of the application and then zeroes in on working capital needs. HDFC Bank’s entry into the small business lending category should be a welcome development for MSMEs who are looking for fast and easy access to necessary funding for their businesses.