Mumbai: In a significant address at the FIBAC Conference, CS Setty, the Chairman of the State Bank of India (SBI) and the Indian Banks’ Association (IBA), highlighted the evolving landscape of corporate funding in India. He pointed out a fundamental shift in how large corporations are beginning to rely less on traditional bank loans and increasingly explore alternatives in capital markets and private funding channels to cater to their long-term financial necessities. This trend is reshaping the banking sector and raises crucial questions about the future of corporate lending in India.
According to Setty, the growing preference for alternative funding sources is forcing banks to reassess their strategies. “Corporate lending is steadily moving away from banks, with large corporates increasingly tapping capital markets and internal resources,” he said. This is corroborated by recent research from Boston Consulting Group (BCG), which indicates that over the past decade, the share of corporate funding through banks has declined sharply. These insights urge banks to pivot towards innovation in products and services, enhancing customer experience while supporting emerging business areas.
Setty further elaborated on the current state of corporate finance, stating that small and medium enterprises (SMEs) are better equipped financially, sitting on significant cash reserves estimated at around Rs 13.5 lakh crore. This financial buffer enables them to fund their expansion and ongoing capital expenditures through internal accruals. For instance, many SMEs, operating primarily as B2B entities, continue securing orders from larger corporations while effectively managing their finances. “Our internal estimates put this at about Rs 13.5 lakh crore. Even if there is an immediate requirement for capacity expansion, most of them are financing it through their own internal accruals,” Setty commented.
However, he also highlighted a significant conundrum in capital expenditure (capex) planning: the critical need for demand visibility. “A lot of people say capex will come in only if there is sustained demand visibility. But which comes first? Demand visibility or capacity creation? That is the dilemma,” he noted. Setty emphasized that when demand rebounds robustly, corporations should be adequately prepared regarding capacity to meet that surge in demand.
Revisiting Mergers and Acquisitions Regulations
On the topic of mergers and acquisitions, Setty expressed the need for regulators to reconsider existing norms that restrict banks from financing certain acquisition deals. Historically, concerns surrounding hostile takeovers have necessitated these constraints. However, he argued that the regulatory framework should evolve, especially for listed companies where acquisitions already receive shareholder approval. “Historically, banks have been restrained from funding acquisitions due to concerns around hostile takeovers. But today, at least for listed companies where acquisitions are approved by shareholders, the regulatory framework should consider allowing some support from the banking system,” he said.
Setty’s insights into the regulatory landscape coincide with the Reserve Bank of India’s (RBI) recent initiatives aimed at easing regulatory constraints on banks. “I don’t think it is about supply, it is about demand. We are all set, and hopefully, the demand for corporate credit comes back soon,” Setty remarked, suggesting a readiness for the next cycle of growth in the Indian economy. This optimistic outlook reflects an anticipation of a rebound in the banking sector, driven by improved economic conditions and increased analytical insights into market trends.
Emergence of Private Credit in the Indian Landscape
The rise of private credit is another critical trend gaining traction in the Indian finance ecosystem. Since traditional banks may not entertain many businesses, dedicated private credit arms have emerged to cater to these companies, providing them the required funding. Firms such as Kotak and InCred are raising money from high-net-worth individuals (HNIs) and family offices to lend to mid-market businesses, filling the gaps left by traditional banking institutions.
This evolving scenario presents both opportunities and challenges for various stakeholders in the financial system. Corporates and SMEs must now navigate a complex landscape where access to traditional funding sources is evolving. With innovative funding mechanisms and the increasing role of private credit, parameters of financial sustainability are changing. The strategic decisions made by banks, corporates, and regulators today will determine the future trajectory of the Indian economy, emphasizing the necessity of monitoring emerging trends and adjusting strategies accordingly.
As the narrative in the corporate lending sphere continues to evolve, stakeholders must keep an eye on how these regulatory and market dynamics will steer the banking sector in India. Opportunities for growth abound, but they come with the challenge of rethinking established practices and embracing innovation.
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Original source: bfsi.economictimes.indiatimes.com
