NBFC edge in loans to small units

Non-banking financial companies (NBFCs) are set to take the lead in providing loans to micro, small and medium enterprises (MSMEs) in the next five years compared with commercial banks.

By Our Special Correspondent in Mumbai
  • Published 26.03.18
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Mumbai: Non-banking financial companies (NBFCs) are set to take the lead in providing loans to micro, small and medium enterprises (MSMEs) in the next five years compared with commercial banks.

Overall loans to the MSME sector, at Rs 16 trillion as on March 2017, is expected to pick up and grow 12-14 per cent over the next five years, credit rating agency Icra said.

This growth will be powered by NBFCs and housing finance companies, which will provide loans to the smaller players in realty. The compounded annual growth (CAGR) of credit from these two are expected at about 20-21 per cent.

However, bank credit to this segment, which accounted for about 84 per cent of the total MSME credit, is estimated to grow at lower CAGR of 9-11 per cent during the same period. According to A. M. Karthik, assistant vice-president and sector head, financial sector ratings, Icra, the non-banks' share should expand to 22-23 per cent by March 2022 against 16 per cent in March 2017.

"Non-banks, with their niche positioning, differentiated product offering, good market knowledge and large unmet demand, would be able to grow at a healthy rate vis-à-vis banks." He said the unmet credit demand, already high at Rs 25 trillion in the last fiscal, is only expected to go up.

The Icra note said demonetisation and the GST has impacted the segment's performance, It expects the various initiatives of the government such as the setting up of MUDRA (micro-unit development and refinance agency) would channel credit to the segment.

However, asset quality has weakened for all lender categories. Bank NPAs to the MSME sector stood at around 8.4 per cent in March 2017 while that of non-banks at about 3 per cent. It is felt that while the asset quality among non-banks could worsen from the current levels, the extent of deterioration may be lower than for banks.

Icra said the ability to diversify and scale up small loans (where yields are better), without impacting operating efficiencies and credit costs, would be crucial for NBFC profits.