By Aishwarya Bagri
Micro, small and medium enterprises are the anchor of Indian economic growth. Employing a number of people, the number of MSMEs stood at 36.18 million in the financial year 2017.This figure leads us to the importance of credit to the understated sector.
How borrowing helps
Lending allows the sector to invest and make business decisions; thus, borrowing enables growth in the sector. Credit to MSMEs is expected to grow at 12 to 14 percent over the next five years, according to a report by ICRA. The growth will mainly be supported by NBFC credit. Housing finance companies and NBFC’s are expected to expand at about 20 to 21 percent compounded annual growth rate in this sector, in the next 5 years. Currently, at 16 percent, a non-bank share of the credit is expected to be 22 to 23 percent for 2022. Bank credit sits at 84 percent of total MSME credit and its expected growth rate for the same period is 9 to 11 percent. Furthermore, the public sector banks’ lending to the sector is expected to grow at 7 to 9 percent, a tad lesser than that for the private sector banks at 16 to 18 percent.
These figures imply that NBFC’s are in a better position to assess and lend to MSMEs in comparison to the banking sector. The report indicates that NBFC’s have a customized 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.
Non performing assets
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 bank’s lending capacity. The effect of this is seen in the case of bank credit to MSMEs. The ICRA report says that NPA’s in the MSME space is 8.4 percent for the banking credit and 3 percent 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 NBFC’s and housing finance companies are going to take a bite out of the banking sector’s piece of the MSMEs pie.
These facts do not deny the paramount potential of the MSMEs sector. The ICRA report measures the credit to MSMEs at Rs. 16 trillion for the financial year 2017. Also, it pegs the sector’s unmet credit at a massive Rs. 25 trillion. As the nation’s second-largest sector in terms of the number of people employed grows, the unmet credit is only expected to rise.
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