Transforming MSME Lending Landscape: Unpacking FY24 Growth Numbers

According to data in RBI’s annual publication, “Trends and Progress of Banking in India,” released on Thursday, Dec 26, 2024, MSME credit flow continued to accelerate in FY24, recording a 20.6% growth in the total amount outstanding. In a reversal of the trend witnessed in the past two financial years, the number of MSME loan accounts also saw 20.5% growth in FY24.

Private sector banks have maintained a steady double-digit growth rate in credit to the micro, small, and medium enterprises (MSME) sector, achieving growth of 28.7 % in FY24. Overall credit extended by Scheduled Commercial Banks to the MSME sector rose to ?27.25 lakh crore, accounting for 19.3%of the total adjusted net bank credit as of March 31, 2024.

A notable shift in FY24 was the rise in the number of MSME credit accounts with the Scheduled Commercial Banks, reversing the trend observed in the previous two fiscal FY22 and FY23. The growth in credit disbursed to MSMEs slightly outpaced the increase in the number of accounts, leading to a higher average credit outstanding per account.

Non-banking financial companies (NBFCs) also expanded their footprint in the MSME credit domain, accounting for 11.7% of total MSME credit. NBFCs' adoption of a ‘Digital-first’ strategy, including the adoption of account aggregator frameworks and fintech partnerships, has further enhanced credit flow to the MSME sector. NBFCs reported a 33.5% y-o-y growth in MSME credit in FY24. In fact, the MSME service sector contributes nearly 70% of the total credit extended by NBFCs to the?MSME?segment.

Growth in credit flow to the MSME Sector has increased not just from Banks and NBFCs but also from non-traditional sources.

The emergence and rapid adoption of DPI (Digital Public Infrastructure) by consumers and businesses has catalysed a wave of innovations in lending. Traditionally, MSMEs faced significant hurdles in accessing credit due to a lack of collateral and insufficient business/credit history. However, the advent and adoption of digital technologies and reforms like the GST (Goods and Services Tax) have generated substantial data footprints, enabling fintech companies to innovate new ways of credit assessment methodologies for lending to MSMEs.

Cashflow-based lending, primarily Supply Chain Finance (SCF) has emerged as a winner in enabling affordable and convenient credit to MSMEs and led a large-scale financial inclusion of small businesses. SCF globally is a US$ 2.4 trillion (INR 204 trillion) market and has grown at a robust compound annual growth rate (CAGR) of 22.7% over the past seven years (WSCF Report 2024). While the exact size of the Indian SCF market is subject to estimation, it is believed to exceed INR 2 lakh crores, with fintech driving approximately 30% of this growth.

SCF has been crucial for MSMEs to optimize their cash flow cash flow and support operational growth. Digital platforms have transformed the SCF landscape, streamlining the entire processes resulting in a considerable reduction in transaction costs and enhanced transparency. Banks, previously averse to lending to a large proportion of MSMEs due to perceived higher risk, are now actively partnering with fintech companies to build SCF portfolios, recognizing the potential for both low risk and comparatively higher returns.

The exponential growth in the volume of invoices being financed on the TReDS (Trade Receivables Discounting System) platform is a testament to rising cash flow-based lending for MSMEs in India. TReDS is?an online electronic platform and an institutional mechanism for factoring in trade receivables of MSME sellers. FY24 was a transformational year for TReDS.? Revision of the TReDS guidelines in June 2023 enabled financiers to obtain insurance to hedge against default risk; this helped expand the pool of financiers and enabled a secondary market for factoring units. This led to an 80.3% rise in financing value and a 62.5% surge in financed invoices on the various TReDS platforms. The success rate of invoices financed on the TReDS platforms climbed from 93.9% in FY23 to 94.4% in FY24.

The robust growth in credit flow to MSMEs in FY24 underscores a dynamic and evolving credit ecosystem. This positive trajectory is driven by the concerted efforts of Banks, a surge of digital innovation, fintech evolution, and supportive regulatory frameworks. While credit challenges in the MSME sector remain and require consistent, long-term efforts from all stakeholders, the sector’s credit growth underscores the impact of increased financial inclusion driven by the DPI, continued government and regulatory support, alongside collaborative efforts by banks, NBFCs, and fintech that have enabled cost-efficient and innovative MSME lending solutions.