Beyond Funding: How Kotak Mahindra Bank is Architecting the New SME Ecosystem

In an era where India’s 10 trillion economy hinges on the growth of its small and medium enterprises, the role of banking is shifting from being a mere financier to a strategic knowledge partner. In an exclusive interaction with FE Aspire, Mr. Shekhar Bhandari, President – SME at Kotak Mahindra Bank discuss the massive formalisation of the sector, the role of AI in credit monitoring, and why capital is no longer the only thing SMEs need to scale. (Edited excerpts)

Q. Over the last few years, we have seen a massive wave of MSMEs transitioning from informal to formal ecosystems. How is this shift fundamentally changing what business owners expect from their banking partners today?

There has been a significant transformation over the last three years. We are seeing a move from businesses driven by instinct to those backed by data and systems and from basic compliance to high levels of transparency. Today, SMEs don't just want speed; they want to be equipped with three things: finances, knowledge and technology. At Kotak, we believe our role is to enhance the knowledge and efficiency of our partners so they can manage their capital cycles better. It is about meeting the real needs of an SME rather than just checking off funding demands.

Q. You mentioned a staggering Rs. 30 lakh crore gap in unmet MSME credit demand despite the 38 lakh crore already funded by the industry. What is holding these businesses back from the formal banking fold?

Everyone wants to be part of the organised sector, but the barriers are often about presentation and data. Many SMEs lack the right access or don't know how to record and present their finances professionally. Another major factor is the seasonality of the industry. For instance, a mango grower may have cash flows that are irregular or only peak every few years. If the lender doesn't deeply understand those specific industry cycles, funding becomes difficult. To bridge this Rs. 30 lakh crore gap, India needs to evolve toward cash flow-based lending coupled with formal, better credit guarantee insurance.

Q. How is Kotak Mahindra Bank evolving its credit frameworks to ensure long-term sustainability rather than just chasing dispersal targets?

We are moving in the right direction, where the focus is on the purpose of the money. Credit disbursals are increasingly tied to sustainability and ESG compliance. It is no longer just about the loan, rather it is about the knowledge,  advisory and the ecosystem we build around the borrower. We want to ensure that every rupee utilised helps the promoter create a more efficient and scalable business.

Q. AI is the talk of the town, but how is it actually working on the ground in SME lending? Is it helping with early warning signals or just making the paperwork faster?

AI is giving us “eyes” and "teeth". We now have AI agents that perform data analytics for both the customer and the lender. On the monitoring side, we have moved from simple credit scores to real time tracking of GST filings and cash flows. Interestingly, AI isn't just for spotting "bad" signals; it provides “good” positive warnings too. If a business is performing exceptionally well, our systems can proactively suggest smarter ways to fund its expansion. Processes that used to take 15 days can now happen in minutes/hours.

Q. You have been very vocal about "intellectual stimulus" for promoters. Can you share an example of how Kotak’s collaboration with institutes like the IITs has actually solved a real world business problem?

We want promoters to think beyond immediate gains. We recently had a chemical plant owner who had spent over a crore trying to solve a solvent problem for 15 years. Through our program, he found a solution that saved him 50% in solvent costs and improved net margin. Another promoter in the mattress industry used our workshops to integrate AI into his products to improve sleep quality. When a promoter starts seeing their bank as a premier knowledge partner rather than just a lender, that is when the real value is created.

Q. Sustainability is often seen as a "large corporate" concern. How are you making energy efficiency and ESG viable for a small scale manufacturer?

It starts with awareness. We worked with IITs across India to conduct energy efficiency audits for about 160 MSMEs across India. Sometimes the solutions are incredibly simple, like replacing copper piping with aluminium, re-routing energy flow, and smart usage of extra energy. These small changes have resulted in collective savings of over Rs. 127 crore for these businesses. By making sustainability logically and financially viable, we ensure it becomes a core part of their growth strategy.

Q. Digital frameworks like TReDS and GeM are changing the landscape. How is Kotak leveraging these to protect SMEs from risks like fraud while improving liquidity?

We are partners on all major TReDS platforms, which significantly reduces the cost of financing for vendors by matching them with the right partners. While the individual space has seen fraudulent transactions, the SME space has remained relatively secure because the controls are tighter. However, we don't take that for granted. We constantly educate and prevent because, as more SME’s enter the formal ecosystem via GST, the responsibility of the bank to protect that growth increases.

Q. Finally, what is your message to the entrepreneurs who are building the "New India"?

You are the pillars of our 10 trillion economy. My message is simple: focus on knowledge, advisory, and ecosystem access. Money is a commodity that any bank can provide, but we are here to provide the strategic partnership you need to build an enterprise that grows and lasts.