Credit and Finance for MSMEs: Despite driving financial inclusion at the bottom of the pyramid (BOP) focusing on MSMEs loans, auto loans, and others, small and medium non-MFI NBFCs in the impact sector are facing credit and scalability challenges, according to a new study released on Monday. Based on an analysis of 100 impact NBFCs and a survey among 25 of them, the study State of Impact NBFCs 2021 said Rs 58,000 crores equity capital and Rs 2,32,000 crores in debt-capital in five years would be required to sustain NBFCs’ growth.
Less than 10 per cent of such impact NBFCs have been able to achieve credible scale in the past five years owing to challenges in raising equity and debt capital, the joint study by debt platform Northern Arc, Impact Investors Council (IIC), and knowledge partner TransUnion Cibil noted. NBFCs part of the research — with a portfolio size of less than Rs 5,000 crore and over 75 per cent BOP clients — were from Northern Arc’s portfolio.
“First thing is we need to recognise that these NBFCs bring a lot of value to larger financial services infrastructure in India and if you want to increase coverage of financial inclusion, it cannot come from bigger players becoming bigger. You also need to get a pipeline of smaller players. To get the required capital support, the government can think of a dedicated equity fund of funds for such NBFCs. There could be some institutional solution to bring both equity and debt like a credit guarantee programme specialised for small NBFCs,” Ramraj Pai, Chief Executive Officer, IIC told Financial Express Online.
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Currently, bank funding for early-stage impact NBFCs is limited while more than 70 per cent of funding is from other non-banks, the study noted. Moreover, funding-related challenges have impacted interest spreads (difference between borrowing and lending rates), which have shrunk by more than 200 bps in FY21. Smaller impact NBFCs are most heavily impacted as they are reliant primarily on other non-banks for access to debt capital, it added.
“Bank funding hasn’t been available for small NBFCs because either they are not able to access it or banks are perhaps not willing to lend to them. There is a perception of risk in lending with some NBFCs like IL&FS, Dewan Housing Finance etc., going bad in the past. However, our data doesn’t show much risk at least for small impact NBFCs,” added Pai.
According to the study, loans taken by NBFCs had a gross NPA level as low as 0.04 per cent of the total outstanding portfolio as of September 2021. Of the total borrowings of Rs 61,070 crores by 207 impact NBFCs, only Rs 25.8 crores was classified as gross NPA. In terms of the count of impact NBFCs classified as gross NPA, nine out of 207 impact NBFCs were flagged as defaulting on their borrowings which is 4.4 per cent as of September 2021, it noted.