Arundhati Bhattacharya, chairman of State Bank of India (SBI) is envisioning a world with rewritten banking rules.
The new banking rules aims at SME financing, giving way to funding suppliers to e-commerce players, defense sector while cash flow statements rather than profit projections become the key appraisal tool, said Bhattacharya.
For SBI, cash flow has emerged as the most important parameter for granting loans, followed by corporate governance. All other conventional appraisal parameters have been downgraded in a changed economic environment, SBI chairman said. This comes in the wake of hoards of big-ticket, highly-leveraged projects that have failed to generate cash and subsequently turned non-performing assets (NPAs).
"Earlier, before lending, we used to take your balance sheet and profit and loss account and do some ratios. Now it doesn't work as at the end of the day cash is king. You may have the best parameters but if you don't have the cash, then you would be an NPA account sooner rather than later. So we have changed the way we look at businesses as now cash flow is the most important parameter along with corporate governance," the SBI chief told a gathering of industrialists during an event of industry body Ficci.
Even the revival in the economy would come in a different shape, she said.
"As economy is changing, the lead uptick would come not from the conventional iron ore or cement sectors, it would come from elsewhere. Surely, demand for cement and iron ore would come but they would be lag indicators," she said.
A key positive development is the growth of small entrepreneurship triggered by e-commerce which has redefined how small and medium sector was being looked at.
"The standard way of doing SME loans are not working. A fellow in Dharavi is now doing 10 times the turnover from selling leather jacket through Snapdeal than what he used to do earlier. But he can only get funds at a cost of say 18-25% to scale up. If SBI can find out such people who are selling well and having good track record, we can help such businesses to scale up without bothering about whether that loan would turn bad," she said adding that SBI is ready to fund innovation in businesses.
She curiously did a pullback from her comments on threat posed to conventional banks by the new generation payments banks.
While at Thursday's economic conclave with the Reserve Bank of India (RBI) governor, she said payments banks could intensify competition eat into its margins, on Friday in Kolkata, she brushed off any potential threat.
"Conventional banks are coming up with e-wallets like we have done with Buddy. The only advantage these payments banks can have over us is in providing banking services to the unbanked areas as they would have relatively lower costs of services which we might not be able to match," she said.
But even that advantage could be fleeting for the payments banks as SBI, she said, is building its own low-cost model to expand and ward off such threats.