How India Lends to the Priority Sector: An MSME Outlook

India's economic growth story is undeniably intertwined with the success of its Micro, Small and Medium Enterprises (MSMEs). These enterprises contribute significantly to 30% of the nation’s Gross Value Added (GVA) and employment generation. Understanding their health and the lending ecosystem surrounding them is crucial for continued economic momentum.

This edition of the Yubi Collective delves into the priority sector, in particular, The MSMEs.?

MSMEs are increasingly understanding the importance of obtaining formal recognition for growth. This recognition is essential for them to access credit from formal institutions such as banks and NBFCs, along with various benefits provided by current and forthcoming government schemes.?

As an industry leader with a vested interest in accelerating financial inclusion, here's our hot take on the developments in the lending landscape for MSMEs.

Indian Macro Economic Perspective

India's economy is firing on all cylinders, driven by robust domestic demand and a surge in private investments. With businesses and consumers feeling optimistic, the country is on track for substantial growth.?

Despite concerns about high-interest rates and inflation, the resilience of rural demand and the flow of credit are keeping the momentum strong. It's like watching a well-oiled machine in action, with every part working in sync to propel India forward into a promising future.

These figures showcase a positive shift towards increased investment (GFCE) and stable private consumption (PFCE) as a share of GDP.? This trend, coupled with resilient demand, is fueling industrial activity, particularly in the infrastructure and construction sectors, which witnessed double-digit growth rates in Q2 and Q3 2023. Below is a detailed view of industrial activity gains led by top sectors.?

Credit Growth: A Mixed Bag

Bank credit growth is at a decadal high; the report highlights a negative credit-to-GDP gap compared to the long-term trend, indicating potential for further credit expansion.?

Interestingly, NBFCs have witnessed a sustained rise in credit intensity (loans and advances), surpassing pre-pandemic levels. Conversely, Scheduled Commercial Banks (SCBs) remain below their long-term average (52%) in FY23.? While this can be interpreted as a positive sign (businesses not excessively leveraged), it might also signal limited access to financing for specific segments of the economy.

?The MSMEs & Credit Environment: Opportunities & Risks

MSMEs contribute around 30% to India’s GVA, 36% to India’s manufacturing sector, and 44% to India’s exports.?

In fact, the contribution of MSMEs to the Indian economy has been rising since 2019, further supported by data generated from the UDYAM portal.?

• The rising number of MSME registrations on the UDYAM portal - The above graph reflects a substantial rebound from the pandemic. Since its inception in 2020, registrations have increased by 2.4 times, generating 1.6 times more employment opportunities by FY23.

The top three states, Maharashtra, Tamil Nadu, and Uttar Pradesh, which have the largest registrations of MSMEs among the states, also have the largest share of employment generated. However, states like Karnataka, Madhya Pradesh, Telangana, and Andhra Pradesh have a disproportionate share.

• Improved Credit Accessibility: MSMEs report easier credit conditions, fueled by an optimistic outlook on demand. The Small Business Confidence Index (SBCI) by D&B and Assocham says small businesses' optimism about demand and profitability has inched up in Q3 2023, boding well for the overall growth momentum.

however, a note of caution is necessary; why?

• Payment Delays: Despite an overall improvement in risk profiles, MSMEs continue to face delays in payments. The average payment delay for micro-enterprises reached over 30 days in November 2023, highlighting the need for stricter payment discipline

• Post-Pandemic Lending Caution: Banks have become more cautious after the withdrawal of pandemic support measures. Approval rates have fallen from FY21 levels, with PSUs displaying the most significant drop for medium and high-risk firms. NBFCs remain most cautious about lending to high-risk borrowers

Banks or NBFCs: Is it just a number game?

While traditional banks have focused on MSME lending through innovative models such as co-lending, Non-Banking Financial Companies (NBFCs) have emerged as surprise lenders, growing their MSME loans over three times faster! NBFCs offer custom-fit financing solutions, a major advantage for MSMEs with unique needs.

The icing on the cake? Delinquency rates (missed loan payments) are dropping across the board, from micro to medium enterprises, in both public and private banks and NBFCs. This trend is most pronounced for medium-sized businesses. Banks are also showing a preference for lending to medium-sized firms compared to smaller ones due to risk aversion.?

It looks like the credit tap is opening wider for MSMEs, and with smarter solutions on offer!

Key Sectoral Highlights for MSMEs

The table below summarizes key highlights and recent developments impacting MSMEs across all core sectors:

The MSME Ecosystem Through Yubi’s Lens

The MSME engine is primed, the ecosystem is evolving, and the potential is staggering. While the surge in UDYAM registrations and increased credit accessibility signify a promising outlook, persistent issues such as payment delays and cautious lending post-pandemic remind us of the hurdles MSMEs still face.

However, the resilience of these businesses, coupled with innovative solutions from banks and NBFCs, paints a hopeful picture for the future.

As industry leaders, it's imperative that we leverage these insights to champion the cause of MSMEs, advocating for policies that foster growth and inclusivity. By nurturing this vital sector, we not only drive economic progress but also create a more equitable and prosperous society.

So, let's continue to stay engaged, informed, and proactive in our support for MSMEs. Together, we can build a future where every business has the opportunity to thrive.

Keep your eyes peeled for the next edition of Yubi Collective, where we'll continue to explore and dissect key trends shaping our economic landscape. Thank you for joining us on this journey of discovery and empowerment.

PS: The data and stats used in this newsletter are from a recently released joint report by U GRO Capital and Dun & Bradstreet called the “MSME Sampark Bi-annual report”.