HDFC IDs Liquidity Squeeze In SME Supply Chain

Indian bank HDFC is exploring why small business growth in the country has flattened in the past few years, and one executive at the financial institution thinks he’s found the answer.

According to reports on Thursday (July 14), HDFC’s Aseem Dhru, country head of business banking, commodity finance, rural and agricultural banking, says delayed payments to SMEs are squeezing liquidity throughout the supply chain.

His remarks counter other assessments that small business growth has stagnated because SMEs are burdened by too much debt on their balance sheets.

“We are not seeing an aggregate demand come off, but we are seeing working capital cycle slow down,” Dhru said in an interview with Moneycontrol.com.

The problem, he continued, begins when larger corporations are looking to lighten assets and outsource manufacturing to SMEs. But these companies aren’t getting paid on time from their own customers, creating problems for those small business partners.

He added that, following a slump in commodity prices, inventory prices follow suit; borrowing costs, however, do not. Exacerbating the problem is that growth among SMEs in the country is uneven depending on which vertical you look at.

Altogether, these factors make it difficult for banks to lend to small businesses, despite an ongoing demand for capital, Dhru said.

“This is a business which has an element of risk as you are lending to a balance sheet, not lending to a promoter,” he said of the risk banks’ face when financing small businesses.

According to reports, HDFC’s market share in SME financing is 7 percent, but the bank is looking to double that figure by 2020. Dhru said that the financial institution, however, will be looking at existing small business customers to boost its SME financing figures.