Cash flow will decide SBI loans to small companies now

A new era of credit appraisal is dawning on the nation's biggest lender, when it comes to funding small-scale companies. The State Bank of IndiaBSE 0.45 % is now assessing the borrower based on their bank statements instead of the balance sheet.

"We are now evaluating a company's ability to repay the loan based on their cash flow," said a senior SBI executive. "For this, we draw analysis from their bank statement of one year and collaborate it with their balance sheet."

As of now, SBI is looking at cash flow for small and medium enterprises but eventually, the same methodology will be applicable even for large enter prises. "Basically, the focus will be the earning capacity of the borrower," the executive said.

The development comes at a time when banks, especially state-run lenders, are struggling to stem the rising tide of bad loans. Gross non-performing loans of commercial banks stood at 9.6 per cent of their total lending on March 2017, according to the Financial Stability Report released by RBI in June. The report said gross NPAs could touch 10.2 per cent by March 2018.

A large number of defaulters have blamed their inability to repay loans on the delays in government approval for completing their projects. Some companies are over leveraged as they diversified in many businesses while others suffered due to poor demand for their goods.

Another SBI executive said the bank is looking at cash generation rather than asset creation while giving out a loan. "So, while asset can be created, it has to generate cash to service loans and amortise. The focus is on EBITA (earnings before interest, taxes, and amortisation)."

He said that in earlier days, it was the norm to lend to a company that created assets for the nation, such as a steel producer, cement maker or ship builder, on the assumption that these assets yield returns.

But now, more and more lenders are looking at assessing companies differently due to the sharp rise in bad loans over the last two years.

State Bank of India