Onus on NBFCs to stem MSMEs credit gap rot

Even as one has to accept that there is a considerable credit gap for MSMEs in the country, there is no doubt, whatsoever, that neither the government nor banks, on their own, can bridge the gap. This raises the question on how, and more importantly, who can bring about a semblance of robustness to the sector. Like experts, even the Centre thinks that NBFCs must step in on a more rigorous note and address the credit gap that MSMEs have to weather.

The recent knowledge report, jointly prepared by ASSOCHAM and Crisil, titled ‘NBFCs Gearing Up for Growth’, subscribed a similar move and put the onus on NBFCs. Before going into how NBFCs can resolve the issue, one must have clarity on the magnitude of the credit gap. According to a recent estimate, by next year, it could be to the tune of Rs. 37 lakh crore, half of which will impact MSMEs that are into the manufacturing sector. A good augury is that having realised the extent, and the urgency, the Centre is to do its bit with some schemes. It is of the firm view, quite rightly too, that this gap cannot be bridged solely by banks, and NBFCs must step in and go about addressing the problem more rigorously.

A valid doubt would be on the capabilities of NBFCs and whether they could be relied upon to effectively bring about orderliness. Lest one forgets, NBFCs have been steadily increasing their market share and are expected to grow by 12 to 13 per cent in FY 23 and by 13 to 14 per cent in FY 24, thanks to the three single-digit growth rate over the last 3.5 years. The absolute Asset Under Management (AUM), which was just Rs four lakh crore till March 2008, has shot up by several folds to touch almost Rs 27 lakh crore until March 2022. This clearly indicates how integral NBFCs are to the overall credit ratings and how they have adapted themselves to the agonizing Covid-induced crisis. Balance sheets are now stronger and asset quality problems have been put behind. The conducive macro-economic business environment indicates a strong impetus to support the growth momentum. At the same time, with the interest rate cycle and high borrowing costs, NBFC competitiveness, especially in some of the traditional sectors such as home loans and new vehicle finance may be eased.

NBFCs, on their part, are realigning their portfolio strategy with an increased focus on non-traditional asset classes such as unsecured loans and MSME loans, where the growth rates are expected to be higher than the traditional segments. NBFCs are likely to adopt a more dynamic business model.

Having said this, one must remember that another area designed to address the credit gap is the government’s thrust on digitisation and the increasing role of neo-banks and digital banks. The technology being implemented in terms of payments ecosystems, ONDC and digital tools like AI and open platforms, needs to be imbibed and implemented by the industry to help MSMEs capitalise on the opportunity.