After retail, MSME -The New Golden Bird!

The International Monetary Fund ( IMF ) in its latest World Economic Outlook ( WEO) update has projected growth rate of India to 7.3% in 2018 and 7.5% in 2019as against 6.7% in 2017. This makes India one of the fastest growing country among major economies in the world.
Currently, we are living in a very turbulent time. Global outlook has been positive till now despite we have been facing issues of US fiscal policy ( two more fed hikes in the cards ), rising oil prices ( impacting twin deficits of current account & fiscal )etc. On the domestic side, our GDP is projected to grow at 7.3% in 2018 in which bank credit plays a crucial role.  This year our Government and RBI has taken many steps to bring in more transparency & greater superior levels in our Banks by introducing IBC ( Insolvency & Bankruptcy Code ), AQR ( Asset Quality Review )  that helps in greater credit culture among banks which have been grappling with whopping NPAs of around 10 Lakh Crores.

Now after liberalization of Indian economy in 1991, corporate credit has been a major driver of bank credit growth. But after the introduction of AQR by RBI to cap unwanted risky exposures of Indian Banks, the corporate sector has now saddled with huge chunks of NPAs. It has been losing its own glory days and its ability to grow. Due to this risky factor in corporate credit, much of the banks especially private SCBs (Scheduled Commercial Banks) have shied away from this. They are now absolutely reluctant to lend on some of the large projects. For example – Real Estate Projects.  Due to this, growth in corporate credit has slowed down. Now to drive growth, banks need to look into other segments like retail, MSMEs, consumer durables etc.

Retail has always been the best bet after Indian banks recovered from the Lehman episode in 2008.  From 2010 to present, retail has been the best bet by Indian Banks & NBFCs which we can easily witness by looking at the number of NBFCs, Banks, Fintechs having loan book of more than 50% in retail. More & more NBFCs have entered into this segment to revive their sluggish growth in terms of absolute numbers. Currently more than 1500 Fintechs have already been mushroomed on our Indian soil which leads to more cut throat competition and availability of more supply as compare to demand. After Retail – What next? Who will be the new golden bird for Indian banks? The answer to this question is MSMEs. MSMEs are the second largest employer in India. As per the latest annual report by the ministry of MSMEs for 2017-2018, more than 39.85 Lakh UAM ( Udhyog Aadhaar Memorandum) have been filed since September 2015 to December 2017 which generates lots of employment, entrepreneurship in India. As per the national sample survey ( NSS) 73^rd round conducted during the period 2015-16, MSME sector has been creating 11.10 crore jobs ( 360.41 lakhs in Manufacturing, 387.18 lakh in Trade & 362.82 lakh in the services & 0.07 lakh in Non captive electricity generation & transmission in the rural and the urban areas across the country.

Before 2010, MSME was not given that much importance by the banks as compare to large corporate loans. Due to this, their contribution in the overall banking credit was very low and it was hampering the GDP growth of India. Main reason behind this was high rate of interest, high cost of customer acquisition and lack of collaterals provided to the banks against their loans.  As compare to large corporate loans, the cost of small loans is very high because of small cycle of loan tenure and we can easily judge by the ROI they charge from customers. For instance, a home loan from a Bank & HFC would cost a customer between 8-12% on a reducing rate where in a two-wheeler loan would cost the same customer between 12-16% and sometimes it may cost around 18% and that too on a flat rate. If the cost is high in MSMEs as compare to corporate loans, then the asset quality is very robust in MSMEs in comparison to large corporate loans.


As per the recent financial stability report released by RBI on June 26, 2018, it says that GNPA ratio of SCBs soured to 11.6% in March 2018 and it will further rise to 12.2% by March 2019.  Eleven banks are under PCA (Prompt Corrective Action), two PSBs have been asked to stop lending and taking fresh exposures and the overall industry GNPA was hovering around 21% in March 2018. Due to higher NPAs, tighter norms by RBI like AQR, Introduction of PCA framework, small amount of capital infusion by government in sick PSUs, banks now focus on other segment to drive growth and for this they are focusing on MSMEs in which they have to lend small loans to lots of customers unlikely in large corporate loans. It is the new growth engine or precisely I would say the new golden bird which can lay eggs in the form of growth to Indian banks. It is becoming attractive for the private banks & Non-banking financial companies (NBFCs) for a profitability and Priority Sector Lending (PSL) perspective. Private Banks & NBFCs have aggressively stepped up acquisition efforts through branch expansion and digital initiatives which help in lower turn-around-time (TAT) there by gaining market share from 34% in December 2015 to 40% in December 2017.  Micro & SME Segment constituting 11.7 Lakh Crores exposure out of 51.3 Lakh crores of the total commercial lending exposure as of December 2017 which is 23% of commercial credit outstanding. Micro loans (less than 1 crore) & SME loans ( 1 to 25 crores ) showing YOY growth of 20% & 9% respectively.

PSBs are busy in financial inclusion, entering into small loan segment is not cup of tea for any other bank. There has to be proper due diligence, proper credit guidelines, proper credit underwriting, proper rules & regulations from sourcing to disbursement and after disbursement, proper service to grievances of the customers.  This segment is already heated up with the introduction of newer banks in the form of SFBs (Small finance Banks) , Fintechs which wants every slice of the new cheese in the form of MSMEs. Newer models are coming every other day. For lending to this segment, banks need to check their cost and they have to rely heavily on technology to bring down their cost of acquisition. For example – Earlier  a bank used to take between 4-7 days to open a normal saving account that would’ve costed the bank around Rs 1200-1500. Now with the introduction of E-KYC (technology) it takes few minutes to on board a customer via saving account.  Likewise, in lending, earlier it used to take between 10-20 days to assess a potential home loan application thoroughly by a bank now with presence of data and technology; it takes only few hours to get a home loan from a bank in India irrespective of whichever area you are living currently. Even some private banks offer instant loans which can be disbursed in seconds after the application submitted by the typical borrower. This sector looks promising which can generate more & more employment for our country and can bring back lost glory of Indian banks. After 2010, banks & NBFCs have been banking on retail to drive their growth. Now it is the time for MSMEs to become the golden bird for Indian Banks.