Lending to MSMEs easier with formalisation, says new SBI chairman  

State Bank of India (SBI) Chairman CS Setty on September 2 said that lending to small and medium enterprises and the agriculture sector is still not completely frictionless even though advancements in digitalisation and formalisation that have reshaped the credit landscape.

"While credit should have naturally flowed towards MSMEs and agriculture, this did not happen because these sectors were traditionally informal and had issues with credit absorption," Setty explained. "However, the advent of digitalisation and formalisation has dramatically changed this scenario, enabling us to develop new models to extend formal credit to MSMEs that previously struggled to access it."

Despite these advancements, Setty acknowledged that a significant portion of MSMEs remains without adequate credit coverage. He stressed that for MSMEs to thrive, they need access to key resources such as credit, governance, technology, and market linkage. Although banks and financial institutions are increasingly confident in lending to MSMEs due to greater formalisation, enhancing these sectors' ability to absorb credit remains essential.

Setty also highlighted the broader challenges facing the banking sector, noting, "We often discuss how deposits are not growing within the banking system, which could impact credit growth. However, credit growth is likely to be driven by the entire financial sector, not just banks." This shift reflects a broader move away from a banking-led economy towards a more diversified financial system.

Setty pointed out that the focus is now on attracting investments, particularly into capital formation. "Historically, our economy has been led by banking, but now there's a shift towards investors. The key question is how we channel funds going into pension funds, insurance, and equity markets into capital formation. One solution could be the deepening of the corporate bond market," he suggested.

He emphasised the importance of non-bank participants, such as insurance companies, mutual funds, and pension funds, playing a more active role in the corporate bond market to ensure robust capital returns. He also highlighted the need for universal banks to develop the necessary skills to innovate and deliver new financial products.

Setty underscored that financing activities require specialised skills, especially in emerging sectors that demand future capital. "Universal banks, particularly large ones like SBI, will play a crucial role in infrastructure financing. Although we have significant experience in project financing, there is still a gap in the skill set required to assess emerging areas," he noted.

Finally, Setty stressed the importance of developing internal skills to address new risks, particularly cybersecurity, as digitalisation continues to grow. "All stakeholders, including the Confederation of Indian Industry (CII), must prioritise cybersecurity. This is a critical issue that needs to be addressed as we push further into the digital age," he concluded.