Solo loans drive growth in credit to MSMEs

Mumbai: Micro loans availed by borrowers in their individual capacity for business have been the fastest growing segment in commercial credit. According to data compiled by TransUnion Cibil and Sidbi, micro loans to individuals have grown at 19.2% year-on-year as on December 2018 as compared to 14.4% growth in overall bank credit. There is an increasing number of small businessmen borrowing in individual capacity as access to credit improves.

According to the report, total commercial sector loans stood at Rs 62.3 lakh crore with micro, small and medium enterprises (MSMEs) accounting for Rs 14.8 lakh crore or 23.7% of loans. Within MSME, the micro segment comprising loans of below Rs 1 crore is the fastest growing and stands at Rs 4.5 lakh crore as on December 2018.

This segment has grown at a compounded annual growth rate (CAGR) of 26.1% over the last five years as compared to a 15.7% CAGR in growth to the MSME sector,

“The comparatively higher rate of business lending to individuals has translated into a major shift in the composition of the MSME lending in favour of individuals,” the report said.

However, on the flip side, there are indicators that loans in this sector are coming under stress. NPAs in the individual business loan segment are rising to 8% from below 7% a year ago even as loans to entities in MSME are dropping to below double digits after two years.

Loans to individuals for business are now 41.3% of MSME lending as against 31% five years ago. Small entrepreneurs are raising money for business using facilities such as loans against property, gold loans, loans against shares, loans to professionals, commercial vehicle loans and construction equipment loans.

According to the TU Cibil-Sidbi report, 80% of loans against property and 60% of gold loans are availed for financing business. One reason for this is that credit accessibility has improved significantly. “New-to-credit (first-time) borrowers entering the formal credit sector have accelerated from 2.7 lakh in six months in first half of FY16 to around 3 lakh in first half of FY17 and further to 5.2 lakh in first half of FY18,” the report said. This appears to have been facilitated by the growing share of finance companies in MSME credit.

While this bodes well for financial inclusion, there is a matter of concern. The higher credit is not increasing output in the same scale, which is resulting in the ratio of MSME credit to MSME gross value-added rising from 32.3% in December 2013 to 47.6% in December 18. “Growth of this magnitude needs to be monitored carefully as rapid acceleration in debt build-up is a harbinger of stress in the system,” the report said