From `100 tril­lion to­tal credit, only 25% goes to MSMEs

Banking Frontiers - - Research Notes - Tech Initiatives - Me­hul@bank­ingfron­

The re­port came out with in­ter­est­ing find­ings on MSMEs, as it suited the theme of the con­fer­ence: Pro­vid­ing fi­nan­cial ser­vices to SMEs in an in­creas­ingly dig­i­tal ecosys­tem. It says cur­rently, out of the to­tal for­mal credit of around Rs100 tril­lion, only 25% is ex­tended to MSMEs. MSME for­mal credit is grow­ing fastest for loans slabs be­tween `200,000-`10 mil­lion, points out Ke­jri­val.

Nano, mini and mi­cro loan seg­ments (< `10 mil­lion loan size) ac­count for 40% of credit de­mand (pri­mar­ily on ac­count of pro­pri­etors bor­row­ing for busi­ness). The mini and mi­cro seg­ments lead in credit growth, reg­is­ter­ing a sig­nif­i­cantly higher yoy growth com­pared to over­all small ticket loans. This can be at­trib­uted to the in­creas­ing for­mal­iza­tion and dig­i­ti­za­tion of MSMEs.

The re­port says dig­i­tal MSME lend­ing ac­counts for only 4% of to­tal MSME lend­ing at present. How­ever, it is ex­pected to in­crease to 21% over the next 5 years. This sig­nif­i­cant jump will close the gap with dig­i­tal re­tail lend­ing, which is ex­pected to reach around forty-eight per­cent of to­tal re­tail lend­ing in five years. With a high de­gree of vari­abil­ity in the qual­ity of as­sets in the MSME seg­ment and the small ticket size of ad­vances, suc­cess in this mar­ket will be­long to play­ers who have the re­sources and ca­pa­bil­i­ties for re­li­able credit un­der­writ­ing, and a com­par­a­tive cost ad­van­tage through end-to-end dig­i­ti­za­tion.

While new pri­vate banks are lead­ing in over­all lend­ing to MSMEs, pub­lic sec­tor banks are lead­ing in lend­ing to mi­cro en­ter­prises, finds the study. GST has ac­cel­er­ated for­mal­iza­tion of MSMEs in a big way. MSMEs en­gaged in ren­der­ing non-trade ser­vices like fi­nan­cial ser­vices and ed­u­ca­tion are early adopters of dig­i­tal chan­nels and have shown a higher de­gree of for­mal­iza­tion. The per­cent­age of MSMEs us­ing dig­i­tal chan­nels has in­creased from 41% pre-GST to 47% post-GST. The ad­vent of ad­vanced an­a­lyt­ics along with the ev­er­in­creas­ing data sources can help build mod­els for ro­bust credit de­ci­sion­ing for this seg­ment, solv­ing one of the most cru­cial road­blocks in lend­ing to this seg­ment.

In the south­ern states as well as states like Ra­jasthan and Pun­jab, the share of MSME credit as com­pared to the to­tal credit is quite low. Banks have recog­nised this op­por­tu­nity and these states have shown a healthy growth in MSME credit in FY18, but room for growth in MSME credit still ex­ists, pre­dicts Ke­jri­val.

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