Lending To Small Businesses Grows At A Faster Pace

Lending to small businesses is growing at a faster pace as financial institutions increasingly find means to tap the sector’s credit gap.

Outstanding disbursements to the micro, small and medium enterprises segment grew at annualised rate of 19.3 percent over December 2013 to December 2018, according to MSME Pulse, a quarterly report by TransUnion CIBIL and SIDBI, released on April 11. That’s also because of lending to first-time MSME borrowers.

The lending intensity—measured by MSME loans outstanding as a percentage of gross value added—rose to 47.6 percent in December last year from 32.2 percent in December 2013. The increase in penetration of financial institutions was particularly steep since December 2016, growing 5.2 percent in December 2017 alone, the report said.

The rise, according to the report, could be an indication of a build up of stress in the segment. “Rising credit to GVA ratio needs to be monitored carefully as rapid acceleration in debt buildup is a harbinger of stress in the system.”

The share of the MSME sector to the overall GVA remained steady at nearly 32 percent until December 2018, the report said.

Within the segment of small business loans, part of the lending is to entities while another part is to individuals, who are often promoters of the small scale industries.

The report highlighted that growth in lending to ‘individuals’ continued to outpace lending to entities.

While lending to individuals increased 9.7 percentage points from December 2013 to December 2018, lending to entities rose 5.8 percentage points, the report said.

NPAs In MSME Lending

The rise in bad loans was more prominent in the ‘individuals’ category.

Individual non-performing assets rose to 7.5 percent in December 2018, from 6 percent in December 2013, according to the report. Bad loans for entities declined to 10 percent in December 2018, from 7.75 percent in December 2013.

“As expected, we witness material difference in the NPA rate between the entities and the individual segments. This can partly be explained by the divergent contribution of the public sector banks to the entities and the individual segments,” said the report.

New-To-Credit Customers

The pick-up in penetration of credit among small borrowers, as measured by the increase in new-to-credit (NTC) customers, has continued.

As a percentage of the total borrower base, NTC additions in the ‘very small borrowers’ segment grew from 9.7 percent in the second half of 2017 to 10.6 percent in the second half of 2018. These borrowers have outstanding loans of Rs 10 lakh.

Public sector banks dominated new-to-credit customers in the sub-Rs 10 lakh segment. “Policies that allow the provision of collateral free loans for all loans extended with a ticket size of less than Rs 10 Lakhs under the Prime Minister Employment Generation Programme of KVIC as well as other central schemes are a major contributory factor behind this trend,” the report said.

In the segment of borrowers with outstanding loans between Rs 10 lakh and Rs 10 crore, NTC customers made up 6.7 percent of the total customer base in the second half of 2018 compared to 5.2 percent a year ago.