CHENNAI: Bank credit to the micro, small and medium enterprises (MSME) sector is likely to expand at 11 per cent compound annual growth rate (CAGR) over the next two financial years, according to CRISIL Research. This is way above the 7 per cent anticipated growth in bank credit to India Inc, it added.
This compares to the 13 per cent CAGR seen in the past five fiscals ending 2017, with non-banking financial companies (NBFCs) recording a four-fold increase in their credit book.
“Consequently, the cumulative market share of non-banks in MSME financing rose to 18 per cent in fiscal 2017 from 8 per cent five years ago,” it noted.
According to estimates, the current market size of MSME lending is around Rs 14 lakh crore.While competition has intensified and asset quality weakened, the overall opportunity remains compelling, given the huge under-penetration of formal finance in the segment. Moreover, structural changes such as the goods and services tax will increase transparency in MSME financials.
“Competition in MSME lending has intensified, putting pressure on yields,” said Prasad Koparkar, senior director, CRISIL Research. “For example, in loan against property, net interest margins have compressed 75 basis points (bps) in the past 2 years. Financiers have been trying to protect their return on assets by focusing on smaller loans, where yields are higher, and on unsecured loans. For non-banks, unsecured loans account for 20% of the MSME portfolio as of March 2017.”
According to CRISIL, asset quality in the segment has worsened due to demand side pressures and liquidity issues after demonetisation. “The competitiveness of MSMEs would be determined by the extent of tax avoidance, their position in the value chain, labour cost arbitrage, product offering, local market knowledge and proximity to customer,” it added.