Transforming SME Banking Through Innovation and Digitalization

In an exclusive conversation with Faiz Askari, Founder of SMEStreet, Shekhar Bhandari, President of SME at Kotak Mahindra Bank, shares an overview of the Indian Banking sector from the perspective of SMEs and also highlights the bank’s visionary approach to empowering Indian small and medium enterprises (SMEs). From leveraging cutting-edge digital platforms like Kotak FYN to providing tailored solutions that address unique SME challenges, Shekhar delves deep into how Kotak Mahindra Bank is reshaping SME banking. He highlights the critical role of technology, the bank’s commitment to sustainability, and its ambitious goals to double SME growth in three years. Here are the edited excerpts from this insightful discussion.

Here are the edited excerpts: 

Overview and Strategy

1. How does Kotak Mahindra Bank differentiate its SME banking offerings from competitors?

Our differentiation lies in three core strengths: Connect, Speed and 360-degree holistic approach. 

• Connect (CX): We design truly customised solutions for SMEs — from working capital and trade finance to cash management services and credit access. Delta on the efficiency of our cohort is 14% savings 

• Speed: We have invested heavily in digital platforms that make banking seamless and efficient for small businesses. 50% efficiency in logging in to the loan. 

• 360-degree holistic approach: We deeply understand the SME business model, its unique challenges, and distinct banking requirements. This is why we excel in designing relevant offerings that work for our SME clients. 

2. What role does technology play in Kotak Mahindra Bank's SME banking strategy?

Technology is central to how we serve SMEs at Kotak. The criticality of technology is central to SMEs, given the way they operate, having largely centralised decision-making. We have specifically focused on using digital solutions to enhance three critical aspects of SME banking — access to banking services, the speed of those services, and all services at one place - one login - overall customer convenience. 

Technology is the backbone for us in Kotak, cutting through all facets of banking from business origination, risk management, monitoring, security, learning & development etc. 

3. What are Kotak Mahindra Bank's goals and objectives for SME banking in the next 2-3 years? 

Our vision for SME banking over the next 2-3 years is clear - the industry doubles in 6 years, and we intend to double in 3 years.

We also aim to be the go-to bank for small and medium-sized businesses in India. We want to be the first banking partner any aspiring SME wants to look to for any support. We want to be their partners in growth at every stage of their business and participate in their journey from micro to small to medium-sized enterprises. 

Digitalisation and Innovation

4. How is Kotak Mahindra Bank leveraging digital platforms to enhance SME banking services?

The banking sector is witnessing a fundamental shift. Businesses of all sizes are gravitating towards comprehensive platforms that can address all their banking needs in one place. This is a natural evolution because SMEs want to focus on business growth rather than managing multiple banking interfaces. 

Our response to this shift is:

• RM360: A complete overview for our workforce to have a snapshot of client relationship 

• KPULS: Our latest loan origination system automates and streamlines the loan process with minimal manual intervention, speedy processing and minimum error  

• Corporate Mobile Banking app: Quick, easy and secure access to corporate accounts

• Kotak FYN: Integrated digital banking platform that is not just another corporate banking solution. We have designed it to be an ecosystem that handles all SME needs through a single login. We continuously improve FYN’s existing capabilities and add new features to ensure it keeps pace with evolving SME banking needs. 

5. What innovative products or services has Kotak Mahindra Bank launched for SMEs recently?

Our most significant recent innovation for SME banking is our flagship portal — Kotak FYN. This comprehensive digital banking platform is designed to address the unique needs of small and medium-sized businesses in India. Through this integrated ecosystem, we bring together trade, account services, collections, loans, and payments accessible with a single login. 

What sets FYN apart and makes it truly innovative is how it evolves to the changing needs of our SME clients. We regularly review our offering, introduce new features, and upgrade existing solutions — all so that the SMEs we serve can conduct their banking seamlessly from anywhere at any time. 

6. How does Kotak Mahindra Bank ensure cybersecurity and data protection for SME customers? 

The cybersecurity architecture for the Bank is vast and multi-layered, involving various technologies, processes, and controls to protect against cyber threats. It is governed by the Board approved Information Security and Cybersecurity Policy of the Bank and is supported by standards, frameworks and procedures. 

At an implementation level, the cybersecurity architecture of the Bank includes Governance, Risk, and Compliance (GRC), Network & endpoint Security, Identity and Access Management (IAM), Data Security, Application Security, Cloud Security.The Bank employs various proactive approaches to counter cyber security threats, which include:

• Threat Intelligence and Monitoring – To stay informed about emerging threats.

• Security Information and Event Management (SIEM) System – To analyse security-related data and identify potential threats.

• Phishing Simulation – To test employee susceptibility.

• Customer Education and Awareness – Educating customers on cyber security best practices.

• Thematic Assessments – To proactively assess areas of concern and improve safeguards and controls.

By taking these proactive approaches, the bank strengthens its cyber security posture and reduces the risk of cyber-attacks.

SME Challenges and Opportunities

7. What are SMEs' biggest challenges in accessing credit and banking services, and how is Kotak Mahindra Bank addressing these?

From our deep engagement with SMEs across India, we have identified several challenges holding them back. 

• Access to credit remains a significant hurdle, with the current credit gap in the MSME segment hitting $530 billion. Only 14% of SMEs in India have sufficient credit access.

• Investment in Technology – Infrastructure, Security, Architecture – knowledge as well ROI becomes a significant barrier  

• Build to scale: Lack thought, advisory and execution to be truly world-class enterprise that can grow from USD 1 mn to 100 mn and 1000 mn over the period

• Multiple stakeholders: Most of the MSMEs need guidance – taxation, hiring, fund management et al; for this there’s no one-stop shop for them - they have to rely on multiple touchpoints 

We at Kotak are addressing these challenges head-on. Beyond merely providing easy access to credit, our approach is more inclusive: 

• Simple and Fast: Reducing TAT for our clients was one of our focal points. We’ve reduced TAT by 50% in last few months; 90% of new business is disbursed within 18 days on average 

• Advisors to clients: We are investing in the learning and development of our workforce to offer customised advisory services to help SMEs

• Digitalization: From internal processes for origination to credit monitoring and client servicing – we’re investing heavily on fast and more accessible digital tools and leveraging AI, ML to improve efficiency and accuracy. The origination of the Kotak FYN Platform was to address the above challenges. 

8. How does Kotak Mahindra Bank support SMEs in their growth and expansion plans?

SMEs require support on Finances, digitisation, technology, strategy, employee solutions, estate planning, personal banking et al. We support them in every aspect.  

We have adopted an approach that transcends conventional banking to support SME growth. We take the time to understand each business's unique expansion plans and financing needs, and we structure solutions that align with these specific requirements. They take collection, payment, estate planning, or lending solutions at the right time. 

We further complement this strategy with digital tools that help SMEs improve their business productivity. To ensure that our support makes a tangible difference, we actively ensure that our role is not limited to merely being a financial services provider — we position ourselves as a holistic banking partner that understands and caters to diverse SME needs. 

9. What opportunities does Kotak Mahindra Bank see in the SME sector, and how is it positioned to capitalise on these?

MSMEs play an important role in India’s manufacturing sector, accounting for about 45% of the country’s total manufacturing output, 40% of exports, and almost 30% of the national GDP.  

As new SMEs emerge and as existing businesses grow, they need a banking partner who truly understands their journey. Hence, with banking industry doubling in 6 years, we intend to double in 3 years! Actually growing at double the rate of industry while maintaining the pristine quality with effective measures to manage and mitigate credit risk effectively. 

At Kotak, we aim to be this banking partner and capture the immense opportunity the sector provides. We are uniquely positioned to support this growth because we bring together digital innovation with deep market expertise. This is further backed by our strong financial foundation. This rare combination of strengths allows us to help SMEs unlock their full potential and scale their businesses effectively.

Government Initiatives and Partnerships 

10. Are there any partnerships or collaborations with other organizations to support SME development? 

Partnerships and Collaboration are must for building / providing best product for SMEs. We have found that working with the right partners helps us serve SMEs better. 

Take our collaboration with one of the largest platform partner fintech company to build and enhance Kotak FYN. With this portal, we have made it easier for small businesses to handle their banking needs from a unified platform.

Our partnership with digital lending service providers and payment aggregators provides the last mile transaction technology stack. 

Our role as a lending partner with one of India's largest working capital technology fintech platform, is another partnership that empowers us to offer timely credit access to SMEs by offering working capital and related liquidity programs for enterprise supply chains. 

Future Outlook and Trends

11. What trends do you see shaping the SME banking landscape in the next 2-3 years? 

I expect three key rising trends to reshape SME banking in the coming years. 

• Being Agile: The positioning of MSMEs in the market dynamic gives them the advantage of being agile. Businesses are rapidly moving away from traditional banking methods and embracing agile digital solutions. 

• World Class: The entire ecosystem will need to collectively strive to showcase products, services and solutions extended by India MSMEs on the global stage. Focus has to empower MSMEs to build scalable business model with world class quality standards at its core. 

• Sustainable Banking Solutions: More SMEs are looking at ESG-aligned growth, and they expect their banking partners to support this journey. At Kotak, we have taken a proactive approach to this development and prioritized initiatives that help SMEs operate sustainably. 

12. How will Kotak Mahindra Bank adapt to changing SME needs and preferences? 

When it comes to keeping up with changing SME needs, our approach is fairly straightforward. 

• We are constantly innovating our digital offerings, but not merely for the sake of utilizing new technology. Instead, we are focusing on solutions that solve real problems that SMEs face today — like cumbersome documentation, lengthy banking procedures and tiresome credit application processes. For instance, documentation for 85% of our cases is done digitally. 

• Beyond lending solutions: We’re investing in upskilling our workforce to be advisors to our clients and adopt a 360-degree solution oriented mindset to cater to all financial needs of our clients

• Leverage distribution network: Our network of ~1900 branches across the country will act as an easy accessible touch point to service our clients   

• Future in mind: Kotak has the tactical advantage of being a financial conglomerate with all the offerings- wealth management, estate planning, PE, M&A, fund raising etc, in-house. As partners in growth for our MSMEs, we will prod, ideate and help execute future centric ideas to propel them towards becoming world class institutions. With use of AI/ML tolls we monitor and support in smarter manner. 

We recognize that each industry has its challenges, so we are also developing more tailored solutions for growing businesses. Simultaneously, we understand that SMEs need guidance in today's uncertain environment — which is why we are strengthening our advisory capabilities to help them navigate these challenges effectively.

13. What advice would you give to SMEs looking to grow and expand their businesses in the current economic environment?

My advice to SMEs looking to grow in today's environment is practical and simple. 

• Build TRUST: Given the fact that the sectors significant contribution to country’s GDP and exports, it is essential that MSME’s should be integrated with global value chains (GVC). Trust becomes a key parameter from the lens with which the outside world would see you – with information, knowledge of markets and quality standards as main ingredients.

• Build SCALE: The aim should be eventually to compete on a global scale. Expertise in product development, designing, marketing strategy & adapting to the changing environment around them, should be to gradually expand in size to cater to a wider audience. Also, and I can't stress this enough, SMEs should focus on managing their cash flows effectively. It is often what makes the difference between success and struggle. Growing businesses should not limit their choices to traditional funding sources alone. With various credit options and government schemes available for SMEs, there are more opportunities out there than most businesses realize.

• Build PEOPLE: People are the strength of every business. Investing in their wellbeing, technical knowhow and overall learning and development will be crucial. Having skilled and motivated workforce gives an edge to MSMEs through personalized service and innovative solutions. This is even more relevant to the dynamics of MSME sector where employees often take on multiple roles showcasing flexibility and adaptability to meet the business needs

• Be Digital in Mindset: It’s imperative to remain competitive MSMEs must make the most of the digital tools available to them and be technologically & digitally empowered. This can significantly improve the operational efficiency for small businesses. 

14. Can you share some success stories or case studies of SMEs that have benefited from Kotak Mahindra Bank's services? 

Over the years, we have extended our services to numerous small and growing businesses across India — helping them transform their banking operations and achieve their growth objectives. 

• For instance, one of our SME client, a leading provider of enterprise solutions, has benefited from our advisory and digital solutions:

• Customized online Cash Management Services that helped operational efficiency with business grow three folds in 5 years 

• Took the IPO route with Kotak as banker to issue

• As the sole banker we also facilitated trade and export side of the business

• A family owned SME based in tier 2 city, was facing bottlenecks in scaling operations due to limited working capital and outdated production methods

• Revenue growth: Structured financing solutions helped the SME increase the production capacity, cater to global demand by fulfilling large export orders and upgrade its production process by adapting cutting edge technology

• Global reach: Export financing solutions helped the client create a new growth avenue outside India – doubling their sales in 3 years with 50% of the sales coming from exports 

• Sustainability: The tech upgrade reduced waste, aligning the business with ecofriendly practices valued by international clients 

• Personal Banking: The promoter personal banking, employees banking is fully managed by Kotak 

• A boutique clothing brand partnered with us in early stage of their journey for lending solutions. 

• They subsequently wanted to explore E-commerce space along with traditional business setup. 

• Along with working capital, we extended digital tools like payment gateway for E-com venture 

• Also expedited their workflow authorizations while eliminating paper-based processes

• Result: Online sales accounts for 60% of total sales within 18 months. The brand scaled from regional presence to nationwide retailer. 

Many such growing business that has tapped into the full potential of digital banking, lending solutions and other offerings with Kotak. These examples are a testimony to how the right banking solutions can radically transform business operations.

15. How does Kotak Mahindra Bank measure the impact of its SME banking initiatives?

We firmly believe in evaluating the impact we make. This is why we have prioritized impact measurement for all our SME banking services and initiatives.  

• Sustainability: A prime example of this is Kotak IIT-Madras Save Energy Mission (KISEM). Through this CSR initiative in collaboration with IIT Madras, we aim to promote energy efficiency and sustainability across industries in India:

• Objective is to reduce industrial carbon footprint of MSMEs throughout India. By optimizing energy usage and contributing to greener future 

• 145+ detailed energy audits conducted across 18 industrial sectors to identify energy conservation options

• Resultant: INR 115 Cr of monetary savings

• KISEM centers: IIT Madras hub, along with centers at IIT Bombay, Guwahati, Hyderabad, Gandhinagar, Indore, and Ropar 

• Savings by going Digital: As per our internal analytics, our clients benefitted by reducing their working capital cost by 14% with our digital tools. This further helps our clients to focus on efficiency instead pricing. 

• Scale: We intend to grow at double the rate of Industry expanding our footprint across Bharat and extending solutions to 25 plus industries  

16. Are there any plans to expand Kotak Mahindra Bank's SME banking services to new regions or markets?

Yes, we are actively expanding our SME banking footprint into tier-2 and tier-3 cities across India. We see significant potential in these markets, where many SMEs are looking for their first formal banking relationship. In last 24 months we have doubled our presence in SME Market. 

Our approach combines physical presence with digital solutions. 

We remain committed to ensuring that SMEs in these regions can access our full range of banking services digitally. This dual strategy helps us better serve businesses in these emerging markets.

Our growing branch network becomes fulcrum of our strategy, branches will act as access points for our clients to cater to their service needs.