MOSL: FINANCIALS – NBFC-MSME lending – Challenging outlook-LAP losing its sheen-some dilution in underwriting standards

​FINANCIALS - NBFC: MSME lending – Challenging outlook; LAP losing its sheen; some dilution in underwriting standards

CRISIL conducted a webinar on its outlook for the MSME financing sector in India.

NBFCs gaining market share rapidly

• Against overall system-wide credit growth of ~9% in the past 5 years, the MSME lending book of banks and NBFCs grew at 13% CAGR to INR14tn currently. With a more customer-centric, on-the-ground approach, NBFCs have achieved stronger growth than banks with their MSME lending book growing at 32% CAGR vis-a-vis 10% for banks. Consequently, their market share increased from 8% in FY12 to 18% in FY17. Going forward, NBFCs are expected to grow this book at ~20% CAGR, while that of banks should grow at ~9% CAGR.
  

LAP a key driver of MSME lending…

• As is well known, LAP has been a focused product for several NBFCs over the past few years, given large scalability potential, attractive margins and modest delinquencies. As a result, the LAP portfolio (for banks and NBFCs) grew at 26% CAGR over FY12-17 as compared to 10% CAGR over the same time period for non-LAP MSME financing. It now accounts for 24% of overall MSME lending, compared to 15% in FY12. For NBFCs alone, it accounts for 67% of the MSME lending book. However, given increased competition, declining margins and lower demand post demonetization and GST, the LAP portfolio is expected to growth at 13-15% CAGR over the next two years, reaching a size of ~INR4.2t by FY19.