Non-banking finance companies have, of late, become the go-to place for micro, small and medium enterprises in need of funds. Lending to MSMEs had earlier been the forte of banks and NBFCs had a limited role in this segment.
But now, this is changing. Enquiries with many small businesses showed one common and recurring theme — the absence of sufficient and timely funds from the banking sector for their working capital or investment needs.
There are over 51 million such enterprises in the country contributing to about a third of GDP — so the dimensions of the problem are widespread.
One facet of the problem has simply been the cornering of bank credit by large corporates. Of the ₹26 lakh crore lent by Indian banks to industry, large firms have taken away ₹21.5 lakh crore or about 83 per cent of those loans.
In spite of having over 3,000 specialised branches that deal with MSMEs, bank lending to the sector has remained lukewarm. According to RBI estimates, the total requirement of funds for SMEs is around ₹26 lakh crore but banks have provided just 40 per cent of that so far.
Traditionally the lenders to the under-served truck and transport system, NBFCs are now gradually expanding their lending to MSMEs.
TT Srinivasaraghavan, MD, Sundaram Finance, told BusinessLine that the definition and scale of an MSME has been changing and can vary depending on whom you talk to.
If one adopts the definition of an MSME as a unit with investment of up to ₹5 crore in plant and machinery, he argues that even financing a truck operator who owns 15 trucks (₹30 lakh each) should qualify as a MSME lending.
The scope and scale of funding is wide, with both small exposure of ₹5-20 lakh as well as lending to enterprises with a turnover of ₹100-1,000 crore coming under the umbrella.
The loans being given to MSMEs are mainly under project finance, equipment finance, business loan or loan against property (LAP). Srinivasaraghavan says that a majority of what passes for MSME lending is really LAP, where the entrepreneur’s residential house is the collateral and the risk is perceived to be lower. By whatever name, the overall quantum of advances by NBFCs to these enterprises is on the rise.
Companies such as Mahindra Finance, Bajaj Finance, Reliance Commercial Finance, Fullerton India, JM Financial, Centrum Finance are among the many NBFCs who are expanding their MSME lending portfolio. Fullerton, for instance, has seen a doubling of its MSME portfolio in three years from around ₹1,900 crore in FY14 to ₹4,150 crore in FY17. Reliance Commercial Finance’s lending to SMEs saw 8 per cent growth in 2016-17 to about ₹8,830 crore. For Mahindra Finance, about 5 per cent of its nearly ₹44,000 crore loan book is for SMEs.
Rakesh Makkar, Executive VP, Fullerton India, said: “NBFCs have become a major source of working capital for small and mid-size companies. New-age NBFCs, with the help of technology, are redefining turnaround time and product offerings. The trend is picking up at a faster pace as SMEs find this option very convenient to access funds easily and quickly.”
Why banks fight shy
So, what is stopping banks from lending to MSMEs? More often than not, it is because of the lack of proper accounting systems, updated financials, and proper documentation among many of these MSMEs.
With the size of each loan being relatively small, there are issues relating to costs of processing as well of recovery. The overall experience of banks’ funding of MSMEs cannot be rated as a happy one. Banks are, therefore, not very gung-ho about lending to the sector, regulatory and political exhortations notwithstanding — and that is leaving a funding gap that needs to be filled.
NBFCs are displaying a new confidence in lending to small businesses. Some of them have begun cautiously, terming it as ‘ecosystem lending’.
Mahindra Finance, for instance, lends to MSMEs that are suppliers of components and parts to its parent Mahindra & Mahindra and other original equipment manufacturers. This gives them better visibility of cash flow and the supply chain dynamics that impact the ability of the borrowers to repay.
NBFCs are in a sense supplementing what banks are doing although it would be premature to say that they will replace banks in this sector.