In India, MSME (Micro, Small & Medium Enterprises) constitute 29% of GDP and 44% of exports. The sector employs 12.3 Crore of labour force as per latest statistics available. The MSME sector in India has sustained its share in the growth of economy over the years and has protected the economy from global adversities and shocks. The sector is a critical stakeholder to the large companies and industries, providing them with necessary parts and components. The MSME sector has been instrumental in promoting economic activities in rural and less developed areas. As India gears upto move from the current level of GDP of $ 3.6 Trillion to $ 5 Trillion by 2027-28, MSME are expected to increase their share of GDP to 40%. Despite its critical importance to the economy and society, MSME sector in India faces similar problems like its global counterparts – access to finance.

As per an ET article, the decade of 2020’s started with an estimated shortfall of INR 16 lakh Crores lending to MSME. Credit deficit has been a key reason for the slow growth of the MSME sector in the country.

In addition to the quantum of finance availability, there are other challenges faced by MSME sector when it comes to availing existing finance facilities. Financial institutions need to navigate well known challenges such as lack of credit history, inadequate collateral, lack of awareness about government schemes, and high interest rates when they deal with MSME. Over 90% of the sector consists of micro enterprises where credit assessment and provision present multiple challenges. These deep-rooted factors have made it difficult for MSME to secure financing; this has hindered the sector’s growth and development. As per TransUnion Cibil Report, only 250 K units out of India’s 630 K units have obtained credit from the formal financial sector. MSME sector remains underserved by the formal finance sector.

India is gearing up for another significant year of economic growth in FY 25. It is expected that the Government policies and schemes that are already in place will be further boosted by large budget allocations & new initiatives will be announced as we move into the budget season.

Key trends in MSME financing in 2024 and even beyond are enumerated here:

Sanctions and disbursals by the formal sector has increased significantly in the last few years and will continue to increase in the foreseeable future

  • Commercial credit portfolio grew at 15% year-over-year (YOY) and credit exposure stood at INR 27.7 Lakh Crores in FY 23-Q4. The government guidelines require banks to achieve a 20% YoY growth in credit to micro and small enterprises. There has been a notable increase in credit operations within India’s banking sector, occurring against the backdrop of a dynamic global landscape. The surge in credit activities is evident in various forms within the Indian banking sector.
  • Loan disbursements have seen a significant uptick, spanning various sectors such as retail (including mortgages and personal loans) and corporate loans for infrastructure and manufacturing. Banks are currently extending credit at unprecedented levels. Compared to FY 20-Q4, commercial loans disbursement saw 1.7X growth as of March 2023.
  • The credit portfolio is experiencing expansion, with a broader range of loan types catering to a diverse spectrum of borrowers and their needs. This strategy not only mitigates risk but also fosters a more inclusive financial development.
  • The ascent of new technologies is noteworthy, as banks leverage innovations to streamline credit processes, improve risk assessment, and extend their services to populations previously excluded from banking. This technological integration is a major contributor to the expansion of credit operations
new to credit

New-to-credit (NTC) entities will define the next phase of MSME credit growth

  • Significant amount of credit growth within MSME sector has been driven by “New To Credit” Micro enterprises. In FY 23-Q4, NTC borrowers accounted for 56% of new loan origination in the MSME lending space as per August 2023 edition of MSME Pulse Magazine. The number of MSME in the country is expected to go up from 630 L to 750 L by 2024 and a staggering 500 L of these units ( most of them micro) are expected to be “New to Credit”.

Micro sector (loans below INR 1 Cr) will continue to grow handsomely

  • Indian MSME have depended on a mix of formal and informal institutions financing & significant portion of both formal and informal financing have gone to micro enterprises with smaller ticket size of the loans.

MSME credit performance has improved in the last few years

  • After the challenges brought on by the pandemic, there was an initial surge in delinquency rates. However, over subsequent quarters, there has been a gradual decline as Micro, Small, and Medium Enterprises (MSME) consistently met their credit obligations. The decrease in delinquency rates is observed across all three categories of lenders, with private banks recording the lowest rate at 1.4%.

Government policy and push will enable the formal banking sector to reach out to the underserved parts of the economy

The Indian government has launched several initiatives to promote MSME financing. Some of these initiatives include:

  • Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE):The CGTMSE scheme provides collateral-free credit to MSME. The scheme guarantees up to 85% of the loan amount, which reduces the risk for lenders and makes it easier for MSME to secure financing.
  • Pradhan Mantri Mudra Yojana (PMMY): The PMMY scheme provides loans up to Rs. 10 lakhs to MSME. The scheme has three categories of loans: Shishu (up to Rs. 50,000), Kishore (up to Rs. 5 lakhs), and Tarun (up to Rs. 10 lakhs). The loans do not require collateral and are available to both new and existing MSME.
  • Stand-Up India: The Stand-Up India scheme provides loans up to Rs. 1 crore to SC/ST and women entrepreneurs for setting up new ventures in the manufacturing, services, or trading sectors. The scheme aims to promote entrepreneurship among these communities and provides support through the entire loan process.

MSME increasingly embrace ESG practices supported by institutional financing and other assistances

  • As more retail and corporate customers of MSME adopt ESG practices, MSME will feel the need to adopt ESG practices in the coming years to retain customers. Further, investors will increasingly look for ESG compliance as a business continuity need in the investee companies. SIDBI is providing financing under multiple schemes towards sustainability projects, solar power and innovative projects. There are avenues such as Green Bonds under various private sector financing options. Off-take by MSME is expected to significantly increase  as awareness about and conducive environment for sustainable economic development goes up across layers of Indian economy.
msme lending

Fintech sector will play a critical role in reaching out to the Micro and small sector

The years ahead will showcase the fintech players penetrating MSME sector using digital approach to solve some of the challenges to MSME lending.

  • Data Analytics: Gaining a deeper understanding of the borrower’s profile is essential for avoiding Non-Performing Assets (NPAs). Fintech startups leverage machine learning methods to analyze and assess the creditworthiness of small businesses, facilitating informed lending decisions.
  • Digital Payments: The introduction of a unified payments interface (UPI) and mobile wallets has revolutionized the speed and security of business transactions. Fintech platforms for payment services not only enable swift payments but also offer additional financial services like investments and short-term loans within a single, easily accessible platform. These platforms can be conveniently accessed through smartphone apps, allowing MSME to conduct transactions and apply for loans using affordable mobile internet.
  • Automated Loan Application: Many MSME face challenges navigating financial processes and find traditional loan application paperwork cumbersome. Fintech platforms streamline the loan application process by employing AI-assisted applications, making it more intuitive and user-friendly. These applications are often customized to meet the specific needs of each customer, eliminating the need for all businesses to undergo the same verification stages. This automation enables fintech services to disburse short-term loans promptly, while also reducing operating costs. The cost savings, in turn, allow fintech companies to offer loans at lower interest rates.

While the macro trends in the economy are largely favorable in the year ahead, parts of MSME sector are facing severe challenges that threaten their existence; To name a few, let us consider limited market reach, lack of innovation, huge gaps in human capital & outdated technology. There needs to be a concerted effort to build organizational capabilities and resilience in MSME sector. It is imperative that the funds flowing into MSME sector are deployed in productive ways by MSME to create long term value.

The capability building exercise, which needs to complement MSME lending, requires several stakeholders to act in co-ordination. Government Departments and institutions as well as several new age institutions assist, incubate & accelerate innovation, technology acquisition, organization strengthening and building world class processes in MSME. We noted earlier that a relatively small section of MSME access finance; the ground reality is that even fewer MSME access capability building assistance and networking opportunities. Creating awareness amongst MSME needs to move from the current incremental approach to an emergency response approach.

The CA community is uniquely placed to contribute significantly to the MSME sector performance.  We need to join the efforts by ICAI  & other institutions in creating awareness of the financing avenues, in building innovative fin tech solutions that enable micro and small enterprises to avail credit and equally important, in assisting MSME in becoming credit-worthy. This concerted approach will lead to MSME sector benefiting significantly from the aforesaid positive trends in MSME lending environment.

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