ULI Must Expand to Bigger Ticket Sizes, Broader Categories to Boost SME Lending: Kotak Mahindra Bank's Shekhar Bhandari

The Reserve Bank of India’s Unified Lending Interface (ULI) is seen by Kotak Mahindra Bank as a potentially transformative tool for SME credit, though its current use remains low and limited to small-ticket loans. The bank stresses that for ULI to significantly change the MSME lending ecosystem, it must expand to larger ticket sizes and more credit categories, such as working capital and asset-backed finance.

In an interaction with FE Aspire, Shekhar Bhandari, President – SME, Kotak Mahindra Bank discusses the bank's approach to integrating ULI, managing risk in subprime lending through CGTMSE, and addressing pressures in microfinance. He also offers insights into credit demand, cost outlook for FY26, and the bank’s plans to innovate for faster and more comprehensive MSME financing solutions. Edited excerpts below:

RBI's Unified Lending Interface (ULI) aims to do for credit what UPI did for payments. How is Kotak preparing for ULI in SME lending, and what adoption challenges do you foresee?

We see the RBI’s Unified Lending Interface (ULI) as a transformative step, much like UPI was for digital payments. We have already integrated ULI into our SME lending journey, and the early results have been promising. It has allowed us to access verified financial data faster and streamlined our credit assessment and application processes. This has made quicker approvals possible. It has also empowered us to offer a more seamless experience for our SME customers.

Currently, however, its use is primarily limited to small-ticket personal or unsecured loans. For ULI to make a meaningful impact on the SME lending ecosystem, it must expand to cover larger ticket sizes and broader lending categories, including working capital, asset-backed finance, and trade credit.

Widespread adoption will also require collaborations across the ecosystem. Financial institutions, regulators, and technology providers must work together to drive awareness and build trust. At the same time, integration with emerging technologies like AI and advanced analytics needs to be accelerated.

How is RBI’s recent rate and CRR cut affecting SME credit costs at Kotak, and what’s your demand outlook post-transmission?

Kotak’s SME lending is linked to the prevailing benchmark. This means the benefits of any policy-level changes in the rates are passed through to our customers in a transparent and timely manner. Following the RBI’s 50 bps repo rate cut and 100 bps CRR reduction, we have accordingly adjusted our lending rates. 

This has brought down the cost of borrowing for our SME clients. For many small businesses, this move has also offered welcome relief. They are now able to manage their cash flows and plan their capital expenditures more effectively.

That said, SMEs today are not just looking for lower rates. They are also demanding smarter ways to price credit. Many enterprises are actively exploring flexible loan structures and optimised repayment models. While credit demand across the industry has softened (down to 13 per cent in FY25 and about 200 basis points lower than the previous year), we expect momentum to return over the next two quarters. 

So, once transmission stabilises and business sentiment improves, we may see a steady revival in SME credit uptake.

Also read: MSME NPAs Mirroring Trends in Overall Banking Sector: CGTMSE CEO Manish Sinha

How does Kotak balance opportunity and risk in subprime MSME lending via CGTMSE, and are you expanding exposure?

We recognise that subprime MSME borrowers often face disproportionate barriers to financing. This is particularly true for those with thin credit files or limited formal history. To address this roadblock, we actively offer collateral-free loans under the CGTMSE scheme for micro and small enterprises. This brings more underserved borrowers into the fold without compromising on the strong credit and risk management framework we've established.

Importantly, our experience with CGTMSE-backed lending has been encouraging. The performance of loans in this segment has been at par with our conventional SME portfolio. This only reaffirms that risk can be managed adequately with the right underwriting discipline. 

We also continue to explore opportunities to expand our exposure in this space in a calibrated manner. To ensure long-term portfolio health, we closely monitor this segment and make data-driven decisions. Ultimately, this allows us to promote financial inclusion without compromising credit quality.

With PSL (priority sector lending) relaxation for small finance banks (SFBs) and NBFCs outpacing banks in MSME lending, do you expect tougher competition, and how will Kotak retain or grow share?

With over 63 million enterprises and an estimated credit demand of Rs 32.5 trillion, the MSME sector in India is vast and still underpenetrated. Only about 40% of these businesses have access to formal banking credit. This leaves a significant opportunity for both banks and non-banks to meaningfully expand their offerings to this user base.

We acknowledge that competition in this space is intensifying, particularly with NBFCs growing aggressively and recent PSL relaxations offering small finance banks more room. However, we are confident that our strategy positions us well. 

Kotak has consistently grown its MSME book at nearly twice the industry average, driven by strong credit underwriting, sector-specific insights, and robust digital platforms. Many lenders still struggle with limited data availability, lack of credit history, and evolving cash-flow-based models. Our ability to navigate these gaps responsibly is why we continue to gain market share. And we see further headroom to grow without compromising credit quality.

Also read: Micro Loan Stress, Dip in NTC Borrowers, Sectoral Shifts: TransUnion CIBIL CEO Unpacks India’s MSME Credit Landscape

What is your current SME portfolio size and YoY growth, and what growth are you targeting?

Our SME portfolio continues to be one of the fastest-growing verticals, not just within Kotak, but also across the industry. In FY25, we have seen strong year-on-year growth in both loan value and volume disbursed. Our current portfolio is growing consistently at over 30 per cent year-on-year, which reflects the scale of our commitment to this segment.

This momentum is the outcome of our focused strategy, benchmark-linked products, and digital-first approach to SME servicing. Looking ahead, we expect to sustain this growth trajectory. We also aim to further accelerate it by increasing penetration in emerging markets and driving innovation in credit delivery. SMEs remain a core priority for us at Kotak, and we are well-positioned to scale responsibly in the coming years. 

Do you expect higher credit costs in FY26 from unsecured lending and microfinance pressures, impacting asset quality?

The microfinance industry has seen significant credit strains, something we had highlighted in Q1 of Fiscal Year ‘25. We have proactively managed the business to bring down the retail microfinance book by 33 per cent YoY, which now constitutes only 1.6% of total net advances. 

Having said that, we expect credit cost to stay at this elevated level for the next two quarters. Interestingly, despite this strain, the microfinance business has been profitable on a full-year basis. The strategic question that we will have to answer is whether the changes in the industry are cyclical or structural and what changes we make to the business model which will determine our approach to this segment.

Beyond current MSME solutions, what new innovations are in the pipeline?

The biggest need for MSMEs is the availability of funds and the speed at which they can access that money. They also require comprehensive solutions for technology and capability enhancement.

At Kotak, we are keenly aware of these needs and are working on a one-stop solution designed to meet the requirements of MSMEs. This includes efficient and timely access to funds, cutting-edge technology, and effective working capital management solutions. We believe that by addressing these critical areas, we can significantly support the growth and success of MSMEs.