Budget 2024: Small lenders pitch for SME funding support, sector guaranteed scheme

India needs to do some tinkering with local tax laws to implement pillar two in line with the Global Anti-Base Erosion Rules (GloBE). (Representative image)

With the Union Budget set to be unveiled on February 1, small lenders have pitched for supportive measures from the government, including finding assistance and credit guarantee support.

A clutch of executives from microfinance institutions (MFI) and small finance banks (SFB) pitched for funding support and the need for a sector guaranteed scheme from the upcoming budget.

These measures, they said, would specifically help small and medium sized enterprises (SME) meet their funding needs as Asia's third-largest economy strives to get back to a huge growth orbit after the pandemic lull.

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MFIs and SFBs are institutions that lend to smaller clients at a margin. These lenders typically cater to the low-income borrower group, including micro, small and medium enterprises (MSMEs) and retail borrowers. On the lending side, MFIs lend small-ticket size loans at an interest rate between 20 to 25 percent. SFBs lend at between 9 and 25 percent, depending on the type of loan.

The overall loan portfolio grew to Rs 3.76 lakh crore at the end of September, up from Rs 3.55 lakh crore in the previous quarter and Rs 3 lakh crore in the year-ago period, Microfinance Industry Network (MFIN), an MFI industry body, said in a report on December 5.

“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 Director (CEO) and Director, MFIN.

Similarly, Udaya Kumar Hebbar, Managing Director, CreditAccess Grameen Ltd, said that the upcoming 2024 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 microfinance institutions as well as their ability to expand to difficult areas.

Uttam Tibrewal, Executive Director, AU Small Finance Bank said: "Any incremental support from the budget to the MSME 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. "

The CEO of a 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.

Where do SMEs stand?

Though some small lenders are looking with optimism to lend to SMEs, lending to the micro and small industries stood at 17.2 percent in November 2023 versus 19.3 percent in November 2022, recent Reserve Bank of India (RBI) sectoral credit data showed.

Also read: Bank credit to industries slows down, shows RBI data

Lending to medium enterprises stood at 12 percent 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.

Industry growth

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 as 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 see a 22-24 percent compound annual growth rate (CAGR) between March 31, 2023 and March 31, 2025.

“As of March 31, 2023, SFB AUM is estimated to have crossed Rs 1,800 billion, growing at 26-27 percent YoY. 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,” CRISIL said.

Some SFBs reported robust credit and deposit growth in the recent past. For example, AU SFB, the largest SFB, in its business update for the October-December quarter of financial year (FY) 2023-24, reported a credit growth of 20 percent YoY and deposit growth of 31 percent YoY.

Tibrewal added: "The healthy growth of SFBs since their inception underscores the largely unmet demand for credit and saving products among the unbanked and underbanked in India."

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Previous budget announcements

In the 2023-24 budget, the Union 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 (NPA) of banks from 7.5 percent to 8.5 percent.