MSMEs on a growth path with rise in credit demand, fall in delinquency rates: CIBIL-SIDBI report

• Credit demand grew at 1.29 times YoY in the quarter ending September 2022.
  
• MSME lending continues to be concentrated in the top ten states that have higher industrialization.
  
• Delinquency rates dropped YoY across private sector banks, public sector banks and NBFCs.

With lenders being able to supply timely credit to resilient MSMEs, the sector is on an accelerated growth trajectory according to the TransUnion CIBIL-SIDBI MSME Pulse Report.

The report also indicates benchmark credit growth in the micro segment owing to an improvement in lender confidence. The measures on formalization of MSMEs and adoption of digital platforms by lenders has enabled them to access granular data on enterprises and improved their confidence for lending, especially to the microsegment of MSMEs.

“The progressive reforms introduced by the government for MSME sector resurgence have borne fruit as reflected in the vigorous business activity and improved credit uptake by enterprises across all the segments,” said Sivasubramanian Ramann, CMD of SIDBI.

Rise in credit demand and credit exposure

Data from the report shows that credit demand – measured in terms of credit inquiry volumes – is correlated to the improvement in business activity. It grew at 1.29 times year-over-year (YoY) in the quarter ending September 2022, while credit supply remained stable with disbursement growing by 24% YoY. Disbursements to micro, small and medium sized enterprises grew at 54%, 23% and 8% YoY, respectively.

Overall, MSME credit exposure stood at ₹22.9 lakh crore as of September 2022, reflecting a YoY growth rate of 10.6%. Bank type wide analysis of credit exposure shows that public sector banks hold ₹7.9 lakh crore, private banks hold ₹10.1 lakh crore, and non-banking financial companies (NBFCs) account for ₹3.1 lakh crore of share.

There are about 77 lakh live MSME borrowers – and this number is growing at 11% YoY. Small segment enterprises comprised the highest proportion in the MSME credit book at ₹9.5 lakh crore, while micro and medium enterprises hold ₹5.8 lakh crore and ₹7.6 lakh crore, respectively.

Higher industrialization equals higher MSME lending

MSME lending continues to be concentrated in states that have higher industrialization. The top ten states based on current outstanding MSME lending balances are Maharashtra, Gujarat, Tamil Nadu, Uttar Pradesh, Delhi, Karnataka, Rajasthan, West Bengal, Telangana and Haryana.

The top ten states constituted 72% of the MSME outstanding balance as of September 2022. Of these ten states, Gujarat and Haryana had the highest growth rate of 15% and 14%, respectively. On the other hand, Rajasthan and Gujarat had the lowest delinquency rate of 1.8% and 1.85% respectively.

Says Rajesh Kumar, MD & CEO of TransUnion CIBIL, “The rapid pace of innovations driven by the government, regulator, and the lending ecosystem has significantly fortified the MSME sector to continue its high growth trajectory. These innovations have provided capabilities for triangulating the power of financial, income and trade information so that credit institutions can get a unified view of the business entity, enabling improved risk differentiation for underwriting MSME loans.”

Reduction in delinquency rates

In this edition of MSME Pulse, a new definition for over 90 Days Past Due (DPD) is being introduced, which excludes legacy accounts with DPD beyond 720 days or reported as loss/doubtful.

The overall delinquency rate on MSME portfolio was 3% for September 2022 (FY23-Q2), down from 4.4% during the same period last year (FY22-Q2). This reduction is due to a drop in delinquency rates across micro, small and medium segments.

These findings emphasize that improved credit flow to the MSME segment can help stabilize the sector and provide much needed financial support to fortify it further.

Delinquency rates have dropped YoY across private sector banks, public sector banks and NBFCs. Private sector banks showed the highest drop in delinquency – from 2.8% in the quarter ending September 2021 to 1.5% during the same period in the year 2022. For PSBs, delinquency rates dropped from 5.3% to 3.9% and for NBFCs from 5.9% to 4.5% during the same period.

Growth in the micro segment of MSMEs

MSME Pulse also studied the growth in the micro segment of MSMEs. Its findings show that disbursements to the micro segment grew by 54% YoY and credit balances grew by 13% YoY as of September 2022.

In comparison, disbursement growth of 24% and credit balances growth of 10.6% was observed on the overall MSME portfolio. Very small ie. Micro1 and Micro2 segments showed YoY balance growth (growth that is sustainable in the long term) of 20%, 15% and 11%, respectively.

Interestingly, more than 50% of new originations came through new-to-credit (NTC) borrowers in this segment – which emphasizes the importance of alternate data sources for effective underwriting.

Even though the micro and small enterprise segments are dominant in the market, less than half of the micro units have access to formal credit, marking a significant opportunity for credit institutions to accelerate MSME lending.

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