The government also needs to improve the infrastructure required to lower their cost of doing business.
Overall SME lending market grew at 13% CAGR in the five fiscals through 2017, to an estimated Rs 14 lakh crore, with non-banking finance companies (NBFCs) recording a four-fold increase in their credit book. The cumulative market share of non-banks in micro, small and medium enterprise (MSME) financing rose to 18% in fiscal 2017, from 8% five years ago.
Asset quality in the MSME segment worsened due to demand-side pressures and liquidity issues after the implementation of demonetisation in November 2016. In fiscal 2017, gross non-performing assets (GNPAs) increased by 70-100 bps across lenders, led by public sector banks.
Over fiscals 2018 and 2019, we expect overall SME lending market to grow at 11% CAGR. NBFCs are likely to outperform banks with sharper focus on small-ticket loans, adoption of technology and data analytics, and focus on small towns and cities.
In the medium-to-long term, GST is expected to have a positive impact on organised MSME industry, given benefits such as availability of input tax credit, efficiency in logistics and capturing market share from unorganised players.
Pradhan Mantri MUDRA Yojana – progress so far
The Pradhan Mantri MUDRA Yojana (PMMY), launched in Budget 2016, aims to provide collateral-free credit of up to Rs 1 million to small business proprietors and partnership firms. In fiscal 2017, loans worth Rs 1.75 trillion were disbursed under PMMY, against a target of Rs 1.80 trillion, which works out to 97% of the target.
The government needs to focus more on increasing the availability of finance for SMEs, and also improve the infrastructure required to lower their cost of doing business.