I have been noticing that financial services lenders and banks take policy calls on not lending to a particular sector(s) at various points in time during economic and industry cycles. Some years back it was the steel industry and now the services and the hospitality sector. Does this stem from the fact that they are unable to understand or forecast and figure out the credit perspective of an individual customer or they are unable to deep dive and understand business models / appropriate sustainability indicators of a particular customer/ industry. This tends to lead the lenders to paint all customers with the same brush , take a blanket call of not lending or lending to a particular sector?.

These blanket calls can be extremely counterproductive in the sense that it pushes existing good customer/ industry players down the well whilst the so called good sectors / customers get more funds than they can handle which subsequently leads to diversion/ mismanagement and finally failure/ defaults.

The problem becomes more acute when it comes to lending to MSMEs for whom liquidity in time is worth ten times the liquidity at a delayed point in time.

In all my interactions with financial services executives for training or consulting, I have been always maintaining that there are no bad industry sectors or bad customers (intentional defaults and frauds excepted) but only bad lenders who do not understand the need of the MSME customers. They tend to evaluate all customers by the same yardsticks irrespective of their industry segment or business models.  

Post Pandemic, lending to MSMEs needs to undergo a paradigm shift. We need focused MSME players who will be looking at solution selling rather than product selling, players who would build MSME portfolio as a normal business activity not a profit management tool to increase yields. MSME lending should not be an opportunistic business but a business where there is a long term opportunity with consistency – the primary lending activity with a long term perspective.   

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