By Aishwarya Bagri
Micro, small and medium enterprises are the anchor of Indian economic growth. Employing a huge portion of the Indian population, the number of MSMEs stood at 36.18 million in the financial year 2017. This figure leads us to the importance of providing credit to the understated sector. Lending allows the sector to access funds that can be used to invest and make business decisions; thus enabling growth in the sector. According to a report by ICRA, credit to micro, small and medium enterprises is expected to grow at 12-14 percent over the next five years.
Who will be the lenders?
The growth will mainly be supported by NBFC credit. Housing finance companies and NBFCs are expected to expand at about 20-21 percent compounded annual growth rate(CAGR) in this sector, in the next five years. Currently at 16 percent, the non-bank share of the credit is expected to be around 23 percent for 2022. Bank credit sits at 84 percent of total MSME credit currently, and its expected growth rate for the same period is 9-11 percent. Furthermore, the public sector banks lending to the sector is expected to grow at 7- 9 percent, a tad lesser than that for the private sector banks at 16-18 percent.
What does this mean for NBFCs?
These figures imply that NBFCs are in a better position to assess and lend to MSMEs in comparison to the banking sector. Non-banks, with their niche positioning, differentiated product offering, good market knowledge, and larger unmet demand would be able to grow at a healthy rate vis-a-vis banks, ICRA’s assistant vice president A M Karthik said.
The report by ICRA indicates that NBFCs have a customised as well as flexible approach to credit assessment. Also, they are more willing to move to smaller ticket loans due to asset quality deterioration in the larger ticket loans, making them suitable for MSMEs.
NPAs for MSMEs
Almost no talk of the banking sector goes without referring to non-performing assets. The banking sector is raddled with bad loans of Rs 10 lakh trillion, primarily seen in the public sector banks. The Reserve Bank of India recently scrapped existing loan recovery mechanisms and replaced them with stricter regulations, requiring higher provisioning. All of this eventually impacts a banks lending capacity. The effect of this is seen in the case of bank credit to MSMEs. The ICRA report says that NPAs in the MSME space is 8.4% for the banking credit and 3% for the non-banking credit. “While non-bank asset quality is expected to worsen from current levels, the extent of deterioration may be lower than that witnessed in banks,” the report states. This implies that there is no doubt that NBFCs and housing finance companies are going to take a bite out of the banking sectors piece of the MSME pie,
These facts do not deny the paramount potential of the MSME sector. The ICRA report measures the credit to MSME at Rs. 16 trillion for the financial year 2017. Also, it pegs the sectors unmet credit at a massive Rs. 25 trillion. As the nations second-largest sector in terms of the number of people employed, grows, the unmet credit is only expected to rise.