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While international banks have traditionally focused on servicing the needs of small and medium-sized enterprises in India’s metropolises, many are now turning their attention towards such businesses in the country’s smaller “tier two” cities.
For many banks, cities such as Tirupur, whose exports alone earn India about $800m, and Moradabad, home to nearly 18,500 small businesses, represent a growing market.
India’s past lack of industrialisation drove many people into entrepreneurship simply to survive. Creating one’s own employment was the only available job option for many. Such national entrepreneurship has developed India into a country that now has 12m small scale industries (SSI) – 95 per cent of India’s industrial enterprises – and this is likely to continue as a new generation of small businesses takes advantage of a galloping economy, government incentives and improved access to finance.
Significantly, as salaries increase and consumerism spreads, it is India’s second tier cities and even some rural areas, that offer opportunities for SSI development. This investment potential has not gone unnoticed by international banks looking to play a part.
Clear examples are emerging of how banks are tapping this particular investment trend. For example, multinationals such as Nokia and Ford, eager to extend their reach beyond the metropolises, are tapping secondary markets by encouraging small entrepreneurs to take on franchises.
These small businesses in turn require banking services such as inventory financing to fund the purchase of necessary products with which to start their franchises and drive development. There is significant growth potential. For example, we are working with a mobile phone distributor in Nagpur that has experienced compound growth of 117 per cent in the past two years alone.
There is also significant growth potential in small businesses that begin life in second-tier cities and rural areas. Family-owned businesses passed down through the generations are precisely the businesses that are keen to adopt modern banking and financing techniques.
As the economy of these smaller cities develops and banks boost their presence both in them and beyond into more remote areas, so too does the level of customer understanding about the banking and finance packages available, perpetuating demand for such services.
Investment in the SSI segment outside these metropolitan areas is not without its challenges. Aside from the obvious challenge of limited credit default data, foreign investing banks also have to reach out without the big branch network of domestic competitors, in some cases using advanced technology instead to target and interact with small business customers.
Overall, however, the opportunities are clear. After the glittering growth story of the “golden corridor” areas, the economy of India’s secondary cities continues to be bolstered by an emergent middle class. This, combined with the expansion of multinational franchises, makes a compelling argument for the growth of small business banking and associated investment opportunities for international banks.
Margaret Leung is global co-head of commercial banking at HSBC.
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