While banks took a cautious stand in lending to the MSME segment due to the steep increase in NPAs, a Crisil study shows that NBFCs have been aggressive in lending to this segment, registering a four-fold increase in their MSME credit book over the past five years.

The integrated research house expects non-banking finance companies to outperform banks in the next two years.

“Opportunities to lend to SMEs is huge but continuous tracking of sectors is crucial for managing risks,” the study says.

Crisil has forecast a compounded annual growth of 11 per cent in lending to micro, small and medium enterprises over the next two fiscals, way higher than the 7 per cent growth anticipated in bank credit to India Inc.

MSME lending market size

The current MSME lending market size is estimated at around ₹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.

“Sharper focus on small-ticket loans, adoption of technology and data analytics and giving greater thrust to smaller towns and cities would give the NBFCs an edge over banks to lend to this segment,” the report notes.

Citing an example, Prasad Koparkar, Senior Director, Crisil Research, said: “In loan against property, the net margins have compressed 75 basis points in the past two years. Financiers have been trying to protect their return on assets by focussing on unsecured loans and loans of smaller ticket size where yields are relatively high.

“And such unsecured loans have accounted for 20 per cent of the MSME portfolio as at end-March 2017 (for non-banks).”

Following demonetisation, asset quality has worsened due to demand-side pressures and liquidity issues. In 2017, gross non-performing assets across lenders increased 70-100 bps.

According to the study, with GST compounding the challenges for MSMEs, especially the unorganised lot, the asset quality could deteriorate before getting better. Given the rapidly changing business milieu and variation in business prospects across sectors and geographies, financiers will need to have a structured decision-making approach and continuous monitoring to manage risks.

“The business potential for MSME units from the same industry but different clusters could vary significantly,” said Ajay Srinivasan, Director, Crisil.

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