Banks are the heart of financial system.  Banks play an important role in the economic development of the country.  Dr. A.P.J. Abdul Kalam’s vision of Indian Banks is that “ All Banks should be a common man’s Bank, to offer all financial products and services to all its customers under one roof, at affordable cost in a fair and transparent manner.”

The ultimate aim of the lending activity by Banks is

  • to improve the Bottom Line business i.e. PROFIT.
  • to construct a broadly diversified portfolio of bank loans that maximizes return and minimizes default risk over the long run.
  • Sustainable development to increase the opportunities on a longer time horizon without striving for the short term maximization of financial profits and return on investment.
  • In the Globalized scenario of banking, besides making profit, social responsibility is also one of the prime agenda of commercial banks. Social banking is  “ banking for the poor rather than poor banking ”.
  • To create long term stakeholder value.

“ we should redefine the metric for effective lending, viz., prioritize loans to enterprises which will generate more employment” is the quote from  “Gyan Sangam” gathering of Bankers and Top level policy makers in Pune.

To achieve the above mission ,  “Focus on Small Size Advances”.


From country’s point of view:

Small businesses are core to economic competitiveness.  They are job creators. They are also instrumental to our innovation economy.  To drive the  economic competitiveness, the focus must turn to micro economic strategies that help a critical part of our economy, small businesses and entrepreneurs,  grow their business and create jobs.

Fostering a dynamic micro, small and medium enterprise sector for sustenance of economic development is a priority for the policy makers, in both developed and emerging economies.  In India too, MSME sector plays a pivotal role in generating employment , increasing cross  – border trade and fostering the spirit of entrepreneurship. The sector contributes to economic development in variety of ways such as creating employment opportunities for rural and urban population, providing goods and services at affordable costs by employing innovative solutions and supporting the export initiatives of the country.

If India has to regain its high growth trajectory and to push growth into top gear, it needs a vibrant MSME sector.

A strong SME Sector is fundamental to building a resilient and dynamic corporate sector.

However, it is deplorable that despite recognizing a widespread need for supporting the sector, the progress on the ground is extremely lackluster and the extent of financial exclusion in the sector is very high. Only 5.18% of units had availed finance through institutional sources with further 2.05% relying on non-institutional sources for finance.  The remaining 92.77% of units had no access to finance or depended on self finance.

From Bank’s point of view:

A dynamic credit market for small businesses allows Banks to grow and drive the nation’s competitiveness globally.  Bank credit is a vital lifeline for small businesses, and often ranks in importance as high as equity from the business owner or friends and family.

Sustainability is an integral part of Bank’s activities – in  core business and beyond. Banks that have been able to convert sustainability challenges into opportunities are the ones that are most likely to thrive.

The strategy of ‘profitable growth from the grassroots’ is achieved by the bankers through lending to small entrepreneurs.


Minimization of Negative Branches:

Negative Branches are those branches wherein the advances  are below the previous March figure. In addition to the negativity of the branches, these branches bring down and hide positive performances of other branches during consolidation of data.

If small ticket advances are focused by the branches, stable & steady growth is ensured and  there cannot be any  negative growth in the branches .

Improvement in Net Interest Margin:

Net Interest Margin is the margin in the interest income over the interest expenditure.  Generally, there is no demand for interest concessions from the borrowers of small ticket advances unlike the big proposals and proposals of  short term bulk advances .  Hence there is definitely scope for improvement in Net Interest Margin, if the funds are focused towards small ticket advances.

Improvement in Priority Sector Lending:

Most of the credits extended to small businesses are categorized under Priority Sector lending.  The Bank has been lending to these sectors so as to achieve the National Goals . Lending under the Priority Sector has a positive impact on the standards of living of the weaker sections of society by providing them with the funds to start small businesses and become self reliant. It has a social objective and the Banks could comply with the guidelines and make its contribution to social upliftment.

Less impact on NPAs:

The impact on NPA level is very much on the higher side , even one large account goes out of order .  The increase in delinquency ratio is also very high in case of large advances.

Moreover, the advantage in low value advances is that possibility of recovery under OTS is very high when compared to that of large advances.

Dr. Raghuram G Rajan, Deputy Governor,  RBI, has spoken that “..the sanctity of the debt contract has been continuously eroded in India in recent years, not by small borrower but by the large borrower and our country has many sick companies but not “sick” promoters.

Increase in exercise of Delegated Authority:

If small size advances are focused, in addition to the above advantages, delegated authority will automatically be exercised by the field functionaries whereby Turn Around Time (TAT) is reduced and customer relationship will be enhanced.

Other advantages:

  • There are loan portfolio diversification benefits from investing in a larger number of small loans.
  • ‘Character’ approach in assessing the loan proposal and physical proximity of the applicant to the bank gives the bank greater familiarity with the applicant’s business and greater ease in monitoring the loan.
  • Accelerated and consistent growth of advances:

Scope and Opportunities for Small Size advances:

Following are  some of the themes , as per Mr. S. S. Mundra, Deputy Governor, RBI during his keynote address  which would define the Indian economy and Indian banking sector in the days to come and which denotes the availability of ample scope and opportunities for bankers in lending small size advances.


Much has been talked about the demographic dividend that India possesses. 68% of India population would be within the working age range (15 – 64) until 2030. Life expectancy of the Indian population is also slated to increase to about 70 years by 2030. While on the one hand the numbers present sustained opportunity for the banks in terms of new stream of customers, it also presents challenges which are in the form of diverse behavior patterns that customers in different age groups display.  The banks would need to continuously foretell the customers’ preferences and focus their strategies on meeting them proactively.


India is also witnessing  a growing trend of urbanization.  By 2030, urban population is estimated to rise to 631 million recording an annual increase of 2.6% as against an annual rise of 1.1% in the overall population .  This would mean that 41.8% of the population would be living in urban agglomerations as against 31% today.  This would open up huge business opportunities for banks in housing, consumption, education needs and so on.


The Government has the commendable aim of making more in India (Make in India).  This means improving the efficiency of producing in India, whether agricultural commodities, mining , manufacturing or services.  “Make in India” will typically mean more openness, as we create an environment that makes our firms able to compete with the rest of the world and encourage foreign producers to come and take advantage of our environment to create jobs in India.

Financial Inclusion:

The launch of PMJDY scheme with a focus on linking each household with a bank account has received extremely positive response .   It is just a stepping stone and the scheme has opened enormous avenues for the bankers on both assets and liabilities side. Financial Inclusion is a profitable business proposition and not as a matter of compliance. ‘Indradanush’ has also laid importance and has stipulated financial inclusion (growth/diversification) as one of the KPIs.


Digitization is another area which is being pursued relentlessly by the Government .   There is massive focus on enhancing internet penetration in the country through accelerated broadband connectivity. There lies inherent opportunities for the banking sector and better utilize this medium as a delivery channel.  Growing mobile and internet penetration has opened new avenues for the entrepreneurs. The costs of banking transactions can also be dramatically reduced due to the advent of technology.

Credit Gaps to be bridged:

Despite the increase in financing to the MSME sector , there is still a considerable credit gap which needs to be bridged.  In terms of the Report of the Private Sector Investment for MSME Sub Group under Working Group for the 12th Five Year Plan (2012 – 2017), the credit gap as a percentage to total demand is estimated at 48% in 2015-16 for the MSME sector as may be seen from the table below:

Estimated Outstanding Credit demand and supply of MSMEs




Total Demand Total Supply Credit Gap in absolute terms Credit Gap as % of total demand
2010-11 2092500 737161 1355339 65
2011-12 2308384 874482 1433902 62
2012-13 2541574 1038948 1502626 59
2013-14 2803628 1237539 1566089 56
2014-15 3089863 1477928 1611935 52
2015-16 3405845 1769659 1636186 48
2016-17 3757755 2124644 1633111 43


In the absence of alternate source of funding for the sector, the role of banks is very crucial in bridging this funding gap. Small businesses are more dependent on bank capital to fund their growth. Bank credit act as a ‘financial accelerator’. In this context, the banks to look beyond their existing customer base and the large corporate and to reach out to the vast number of micro and small enterprises which are presently deprived of bank credit by planning product delivery and building lasting customer relationships which will translate into higher revenues. This will also lead to supply chain financing solutions and small ticket funding to the channel partners of large corporates.

Would large corporate continue to borrow from banks?

Of late, the global markets, particularly the emerging market economies, have been flushed with funds flowing in on account of variants of QEs launched by the Central Banks in the Advanced Economies.  Many large corporate houses have been able to access funds at very cheap rates without needing to reach out to banks.  Further, the large corporate in developed countries normally access financial markets directly for their funding requirements rather than commercial banks.  Hence, as Indian economy and the financial markets mature, more and more large corporate could start by passing banks for their funding requirements.

Inspite of uncertain global environment, India is much better positioned now than before to seize what the Economist 5 calls “ a rare opportunity to become world’s most dynamic big economy.”

Mr. R. Gandhi, Deputy Governor, RBI in his speech  has categorically stressed on the hard relook by banks on their portfolios viz., agriculture, industries, services, retail and other services and to rebalance from the perspective of diversification.  As India is poised for re-entering high growth period, and as greater number of individuals will have higher income and higher financial needs, banks will have ample scope in Retail Banking.

In view of the above and the Government initiative for innovation and start ups to reignite the slowing economy , banking would be encouraged to provide loans in order to support small businesses.  It would be important for the banks to keep track of emerging trends and be prepared not only to negotiate through the imminent challenges, but simultaneously be ready to latch on to the opportunities that present themselves.

Constraints in Small size advances:

  • Small businesses are much more sensitive to swings in the economy and have fewer assets to collateralize the loan.
  • The informational opacity of small businesses adds to the riskiness of small business lending. Many small businesses  lack detailed balance sheets, use sparse tax return and keep inadequate income statements.
  • Small enterprises in many instances, revolve around a single entrepreneur – key man – and lack good succession planning which discourages creditors to lend to such enterprises.

But it is these lower rupee loans that are most important to startups and small businesses that are critical to accelerating the economic development of the country.

While it is commonly believed that small business lending is risky, the study by Texas A & M University, U.S., reveals that small business lending can play a positive role in terms of contributing to bank profitability and failure risk reduction.


“Small is Still Beautiful and Competitive.”

Microsoft which is a software giant today, started off as a small business, as a dream developed by a young student with the help of family and friends. Our own Infosys is another example. Some of the small entrepreneurs could grow into large corporate and potential MNCs in future.

To quote the words of Shri K.C.Chakrabarty, Deputy Governor of RBI,  “….the MSMEs of yesterday are the Large Corporates of today and could be MNCs of tomorrow…”

We would be having  many such seeds of ideas around, but unless they are nurtured with timely inputs in the form of credit, infrastructure and enabling policies, these seeds would remain unfructified.  An enabling environment which encourages and nurtures such initiatives not only helps in realization of entrepreneurial dreams  but also, more importantly , provides employment to many others, encourages other entrepreneurs to dream big and in the process, benefits the economy with improved productivity, higher employment and enhanced competitiveness.

“If you give a man a fish you feed him for a day.  If you finance a man for  activity / business  , you feed him for a lifetime.”

The year bygone was full of challenges on the Domestic and Global fronts.  The business confidence in the market was low. During these testing times the way we approach the problem is what makes the difference. With changing times, there was a conscious change in direction of credit from corporate to conventional sectors of the economy viz. Retail, Agriculture and MSMEs.

Dr. Urjit R. Patel, Deputy Governor, Reserve Bank of India, in his speech  during Business Standard Best B-School Project Awards at Mumbai , has stated that “……a much larger number of small business loans will be encouraged rather than a overriding emphasis on very large loans per se……”.

Let us continue to focus on enhancing our capabilities to capitalize on the growth opportunities arising from the Indian economy and its international linkages.

Let us  setup the road map for growth combined with improvement in asset quality so that Quality and Profitability proceed hand in hand.

Let us  be a catalyst for change that benefits present and future  generations.

Let us focus on sustainability as an integral part of our activities – in our core business and beyond.

Thus, we believe in being responsible to all our stake holders, society and the environment.

About the Author

P Jayalakshmi Kumar
Chief Manager
Union Bank of India
Staff College, Bannerghatta Road, Bengaluru-560083
[email protected]


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