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2013-07-29

Funding gap in MSME sector offers potential market for NBFCs

Lack of credit to MSMEs has opened up substantial opportunities for non-banking financial corporations (NBFCs) in the lucrative MSME lending market.

Lack of credit to MSMEs has opened up substantial opportunities for non-banking financial corporations (NBFCs) in the lucrative MSME lending market.

 

According to the new Analysis from Frost & Sullivan, the MSME Small Loan Credit Market for NBFCs in India finds that market size stood at Rs 7,203 crore in FY 2012 and estimates this to reach Rs 38,417 crore in FY 2020 at a compound annual growth rate of 23.3 percent.
 

According to the industry sources, MSMEs in India have a total finance demand of Rs 32.5 trillion, of which the addressable market for financial institutions is Rs 11.8 trillion. However, only Rs 7 trillion is currently provided by the financial institutions. “This demand-supply gap of close to Rs 4.8 trillion has broadened the potential market for NBFCs in the country, which they need to capitalize on through innovative business models,” said the analyst, Frost & Sullivan.
 

NBFCs will face intense competition from public, commercial and private banks in the Indian MSME segment, as these organizations offer loans at lower interest rates and are backed by a government credit guarantee scheme. In addition, funding costs are higher for NBFCs as they rely on banks, mutual funds and public deposits for financing. This compels them to operate with low interest margins to maintain the balance between higher cost of funds and interest rates.
 

To counter this challenge, NBFCs must lobby with the government for access to cheaper international credit and alternative modes of financing. It will be critical for them to focus on lending to a particular industry, along with enhancing credit underwriting and loan sanctioning mechanisms to improve asset quality.
 

“Decreasing operating costs by refining collection mechanisms, maintaining strict control over overheads and effective risk management will be the key strategies for the growth of NBFCs in India,” observed the analyst. “Moreover, NBFCs need to foster brand equity based on customer needs, reduce paperwork for MSMEs and limit reliance on leverage to cultivate customer loyalty and thrive in the market.”

 

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