Credit and finance for MSMEs: Investment banking company Avendus Capital in a thought paper on MSME lending on Monday estimated an astounding credit gap of $530 billion in the MSME sector. Out of over 64 million MSMEs in India, the report said only 14 per cent have access to credit. While the overall finance demand by MSMEs was pegged around $1,955 billion with a 3.8x debt-to-equity ratio, the total demand for debt-based finance was approximately $1,544 billion.
However, 47 per cent of the debt demand was estimated to be unaddressable as it comes from “enterprises which are not financially viable or prefer financing from informal sources,” the report noted. Hence, the remaining debt demand was left to be $819 million, of which only $289 billion demand was currently fulfilled through formal credit lenders such as private banks, public banks and non-banking financial companies (NBFCs).
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The maximum demand of 45 per cent was met by private banks followed by 43 per cent by public banks and 12 per cent by NBFCs “even as the share of NBFCs has been increasing over the years.”
The remaining unfulfilled demand of $530 billion “provides a large whitespace for lenders in this segment, of which $120 billion demand belongs to small ticket loan segment with a ticket size of less than $1 million,” the report noted.
Anshul Agarwal, Managing Director, Co-head, Consumer, Financial Institutions Group, & Business Services said that the credit gap is a result of the segment being difficult to address, due to which conventional lenders have historically stayed away.
For the uninitiated, a June 2019 report by the UK Sinha Committee constituted by the Reserve Bank of India had estimated Rs 20-25 lakh crore ($242-$303 billion as per current exchange rate) credit gap in the MSME sector, lower than $530 billion estimated in the paper.
Nonetheless, with small ticket MSME NBFC expanding their distribution by aggressively growing their branch networks to reach new customers across India, small size loans are expected to grow 23 per cent from a projected $25 billion in FY22 to $38 billion in FY24, the report added.
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“These nimble NBFCs share common traits which make them thrive in this space. Deep, well-entrenched branch networks into urban, semi-urban, and rural areas, proprietary underwriting, bespoke technology, and a customer-first approach are some of these traits. This has led to an equity deal flow of around $1.5 billion over the last decade,” said Agarwal.
The report expected the deal flow to increase by 10x to around $15 billion over the next decade for these NBFCs “with the Indian economy expected to grow at a rapid pace, there is a significant opportunity for small ticket MSME NBFCs to tap into the underserved market and fuel their growth.”