Small lenders, which include small finance banks (SFBs) and microfinance institutions (MFIs), have pitched for measures like funding assistance and credit support policies from the upcoming budget. Some industry players have said that these would specifically cater to the small and medium enterprises (SMEs), as most of their clients are low-income borrowers.
The overall loan portfolio of the MFI industry grew to Rs 3.76 lakh crore at the end of September 2023, up from Rs 3.55 lakh crore in the previous quarter and Rs 3 lakh crore in the year-ago period, industry body Microfinance Industry Network (MFIN) said in a December 5 report.
MFIs provide small-ticket loans at an interest rate of 20-25 percent. SFBs lend at between 9 and 25 percent, depending on the type of loan.
Uttam Tibrewal, executive director, AU Small Finance Bank, said: "Any incremental support from the budget to the MSME (micro, small and medium enterprise) sector and affordable housing segment would go a long way toward boosting credit availability for millions of micro enterprises and self-employed individuals in rural and semi-urban geographies."
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“In the upcoming budget, we would advocate for dedicated funding support for microfinance institutions with a special focus on small and medium-sized institutions,” said Alok Misra, chief executive officer (CEO) and director, MFIN.
Similarly, Udaya Kumar Hebbar, managing director, CreditAccess Grameen Ltd, said that the upcoming budget holds immense potential to bolster growth in rural India. “Adequate funding support, especially through microfinance, can effectively foster women's entrepreneurship spirit at the last mile,” Hebbar said.
Misra added that a sector-suited guarantee scheme will go a long way in boosting the credit rating of MFIs as well as their ability to expand into difficult areas.
The CEO of an SFB, speaking on condition of anonymity, said there are opportunities for lending to the SME segment as it has seen good growth in the recent past. “We have observed that SMEs have strong credit demand and with some assistance on funding capabilities for SFBs, lending to SMEs can become aggressive,” the executive said.
SMEs growth
Though some small lenders are looking with optimism to lend to SMEs, lending to micro and small industries stood at 17.2 percent of total advances in November 2023 versus 19.3 percent in November 2022, recent Reserve Bank of India (RBI) sectoral credit data showed.
Lending to medium enterprises stood at 12 percent of the pie in November 2023 compared to 27.9 percent in November 2022.
In a written reply in the Rajya Sabha, Bhanu Pratap Singh Verma, Minister of State for Micro, Small and Medium Enterprises, said that the MSME sector in India has continued to demonstrate resilience and growth.
“The share of MSME manufacturing output in the overall Indian manufacturing output remained relatively stable, accounting for 36.6 percent, 36.9 percent and 36.2 percent during the fiscal years 2019-20, 2020-21, and 2021-22, respectively,” Verma said.
How is the industry performing?
MFIN said that the number of microfinance loans extended by all lenders declined in the July-September quarter, but an increase in average ticket sizes helped the quantum of lending to grow.
“Financiers made loans of Rs 76,054 crore in the September quarter compared to Rs 71,916 crore in the year-ago period, but the number of loans declined to 1.69 crore from 1.81 crore,” the report said.
On SFBs, CRISIL in a report last July said that it expects SFB assets under management (AUM) to show a 22-24 percent compound annual growth rate (CAGR) by FY25 from levels on \March 31, 2023.
“As of March 31, 2023, SFB AUM is estimated to have crossed Rs 1,800 billion (Rs 1.8 lakh crore), growing at 26-27 percent YoY (year-on-year).
We expect their AUM to be around 22-24 percent compound annual growth rate (CAGR) between March 31, 2023 and March 31, 2025 as most of the SFBs have completed the transition phase and are likely to benefit from their operating leverage,” the CRISIL paper said.
Some SFBs reported robust credit and deposit growth in the recent past. For example, AU SFB, the largest in the segment, in its business update for the October-December quarter of F24, reported a credit growth of 20 percent on-year and deposit growth of 31 percent.
Tibrewal added: "The healthy growth of SFBs since their inception underscores the largely unmet demand for credit and savings products among the unbanked and underbanked in India."
Previous budget announcements
In the 2023-24 budget, the government announced an expanded corpus under a revamped scheme to enable an additional free collateral guarantee credit of Rs 2 lakh crore for MSMEs.
For banks, Budget 2017-18 increased the allowable provision for non-performing assets of banks from 7.5 percent to 8.5 percent.
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