Finance Minister Nirmala Sitharaman on Monday asked banks to target lending Rs 6.12 lakh crore to MSMEs in financial year 2025-26 and Rs 7 lakh crore in FY27. Speaking at the SBI Banking and Economics Conclave 2024, Sitharaman said the banking community should view MSMEs not merely as a sector of risk but as a sector brimming with opportunity.
“That’s why a few days back, I had set the target of an additional MSME lending of Rs 1.54 lakh crores in this financial year for the scheduled commercial banks and NBFCs, beyond the estimated Rs 4.21 lakh crore to be lent this year with a ‘business as usual’ (BAU) approach. So this increase will be sustained in the next two years as well,” said Sitharaman.
“But banks next year should target lending Rs 6.12 lakh crore in FY 2025-26 and Rs 7 lakh crore in FY 2026-27.”
According to the Reserve Bank of India (RBI), a sub-target of 7.5 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher, towards lending to the micro enterprises under overall priority sector lending has been prescribed for domestic commercial banks, foreign banks with 20 branches and above, regional rural banks and small finance banks.
The minister said traditionally, the banking sector has relied heavily on collateral-based lending models. This approach, while effective in certain cases, does not always align with the unique needs and financial structures of MSMEs.
That’s why in this year’s July Budget, Sitharaman said the government came up with announcements for MSMEs.
“If banks were hesitant to give them term loans as they needed substantial collateral, the government in the budget has announced collateral-free loans to be given for MSMEs. This involves adopting or developing new models of credit evaluation. That’s why the announcement included transition towards alternative credit risk assessment models, such as cash flow-based lending.”
Cash flow-based lending has the transformative potential to address the working capital requirements of MSME units, the minister said.
Sitharaman in this year’s budget had announced the Rs 100 crore credit guarantee scheme for manufacturing units without collateral or third-party guarantee. However, the borrowers would be required to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance.
The minister had also asked sector banks to develop a credit assessment model based on the digital footprint of MSMEs and also strengthen their in-house system for assessing the creditworthiness of MSMEs instead of depending on external assessment.