MSME credit growth to be decadal low in Fiscal 2020 and Fiscal 2021, recovery thereafter through Fiscal
2023

 

{ARs billion)
8
a 5 16
“ 13 BO
12 1 ki
10
10
8
6
4
2
0 3 J i
FY16 FYI7 FYI8E FYI9E FY20E Fy2aP

Note: E: Estimated ana P: Projectea

NBFCs outperform banks’ MSME lending over Fiscal 2017 and Fiscal 2020

Though banks account for a majority share (approximately 89%) of lending to this segment, NBFCs gained approximately
4% of market share over Fiscal 2017 and Fiscal 2020, owing to their aggressive approach, higher risk taking ability, and
better leveraging of their property appraisal capabilities, despite slowing down post the IL&FS default. Banks are also
losing share as some have triggered the RBI’s ‘prompt corrective action’, which restricts lending. However, in the future,
with NBFCs finding it difficult to raise funds and public sector banks turning cautious, SFBs have a good opportunity to
tap into this segment and increase their share.

Banks still account for majority share in MSME credit

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%

0%

  

FYI7 FY20E
= Banks =Non-Banks

Note: E- Estimated

Growth drivers

Low credit penetration for MSMEs

The majority of MSMEs in India do not have access to institutional finance, being either self-financed or availing credit
from the unorganised sector. This untapped market offers significant growth potential for financial institutions.

Five forces that will drive the MSME market

* Increased data availability and transparency: With increased digital initiatives by the MSMEs, the shift towards
their formalisation and digitisation has created an excess of data points for lenders that would help improve the
efficacy of credit assessment and gradually enable provision of credit to previously underserved customer segments.

* Reduction in risk premiums due to information asymmetry: In the absence of reliable information about small
businesses, it becomes difficult for lenders to assess the creditworthiness of the borrower. Hence, lenders often charge
a hefty premium from these customers, leading to higher interest rates — typically approximately 10% to 16% for
secured loans. The interest rate for low-ticket loans, say below 2.5 million, is sometimes much higher. By leveraging
technology and using a combination of traditional data (bureau data, financial statements and credit score), non-
traditional data (payments, telecom, provident fund contribution and psychometric data), and government data

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