SBI Shifts Lending Strategy

The State Bank of India (SBI) is set to revolutionize its lending approach by transitioning from collateral-based lending to cash-flow-based lending for micro, small, and medium enterprises (MSMEs). This significant change will apply to all loans up to Rs 5 crore and marks a pivotal shift in the bank’s strategy to enhance credit access for the MSME sector.

SBI chairman, C.S. Setty, unveiled this initiative, emphasizing its potential to accelerate the growth of MSMEs. "Up to Rs 5 crore, we want to move from collateral-based lending to cash-flow-based lending, backed by guarantee, which will give enough traction to the growth of micro enterprises to become small and small to become medium," Setty stated.

This transition is designed to address one of the longstanding challenges faced by MSMEs: limited access to credit due to the lack of collateral. By shifting focus to cash-flow-based lending, SBI aims to empower smaller enterprises to expand without the traditional constraints of collateral requirements.

Setty also highlighted the importance of developing new skill sets within lending institutions to accurately assess creditworthiness, particularly in emerging sectors like battery storage and hydrogen. "Every type of financing requires a different skill set," he noted, stressing the need for continuous innovation in corporate credit delivery.

Despite operating India’s largest project finance book, SBI recognizes that evaluating emerging sectors requires expertise that is still evolving. To bridge this gap, the bank is collaborating with multilateral development banks (MDBs) and large multinational banks to establish specialized verticals within its operations. These partnerships aim to drive growth in both large corporate credit and MSME lending.

The move to cash-flow-based lending is part of a broader strategy to reduce credit friction and make it easier for MSMEs to access the funds they need to grow. However, Setty cautioned that while this shift will alleviate some of the challenges faced by MSMEs, it will not eliminate them entirely. He emphasized the need for a gradual transition, supported by guarantees, to ensure the stability and sustainability of this new lending model.

The broader financial ecosystem in India is also poised for change. Sanjiv Bajaj, Chairman and Managing Director of Bajaj Finserv, highlighted the necessity of expanding the digital financial infrastructure to support credit growth. He called for the entry of new banks and non-banking financial companies (NBFCs) to create a more dynamic and inclusive financial landscape.

Setty also underscored the importance of deepening India’s corporate bond market to further enhance credit access. He pointed out that while commercial banks play a crucial role, there is a limit to what they can achieve alone. Domestic institutional investors, such as mutual funds, pension funds, and insurers, must take on a more significant role in channeling capital back into the financial system through the corporate bond market.

"There is only so much commercial banks can do on corporate bonds," Setty explained, emphasizing the need for non-bank participants to create products that facilitate the flow of capital.

The shift to cash-flow-based lending represents a strategic pivot for SBI, aligning with its broader goal of fostering a more inclusive and dynamic financial ecosystem for MSMEs. As India’s credit landscape evolves, the role of a diverse array of financial sector players—banks, NBFCs, and institutional investors—will become increasingly critical in driving sustainable economic growth.

SBI’s move to cash-flow-based lending is set to redefine MSME financing in India, offering new opportunities for smaller enterprises to thrive and contribute to the country’s economic development. As this strategy unfolds, it promises to create a more resilient and inclusive financial ecosystem, better equipped to meet the needs of India’s vibrant MSME sector.