MUMBAI: Non-banking finance companies (NBFCs) that lend to small businesses will see $15 billion of investment, according to a report by Avendus. This growth is 10 times the deal flow this segment saw in the previous decade.
According to the report, of the 6.4 crore MSMEs in India, only 14% have access to credit. Their total finance demand is estimated to be $1,955 billion of which $1,544 billion is for debt. Considering that little over half this demand is from viable businesses, the market size is estimated to be $819 million of which only $289 million is met by formal credit.
“We believe that MSMEs are the backbone of our economy and that their growth is pivotal for us to become a $10 trillion gross domestic product (GDP) economy. However, this sector faces a major obstacle in the form of a large credit gap, amounting to over $500 billion, more than $100 billion of which exists for the small ticket loan segment,” said Anshul Agarwal, MD & co-head of consumer, financial institution and business service group at Avendus.
The NBFCs are considered to be better placed than banks because of their low cost branches and wide presence. They also fare better in sourcing customers and assessing customer repayment ability. Unlike banks which prefer safe customers, NBFCs are willing to understand and evaluate an undocumented industry and have their own collection team. They are also good in using technology to pull documents, conduct televerification and employ technology-related cash flow recognition.
“This credit gap is being addressed by high quality specialised NBFCs who are agile and nimble. We reckon that this segment is headed for a virtuous cycle. As the market matures and balance sheets become stronger, cost of funds will rationalise and operating expenditure will become less,” said Agarwal.
“We also believe that this segment is entering a virtuous cycle, and lenders, here will be able to generate 20% return on equity on a sustainable basis,” he added.
According to the report, of the 6.4 crore MSMEs in India, only 14% have access to credit. Their total finance demand is estimated to be $1,955 billion of which $1,544 billion is for debt. Considering that little over half this demand is from viable businesses, the market size is estimated to be $819 million of which only $289 million is met by formal credit.
“We believe that MSMEs are the backbone of our economy and that their growth is pivotal for us to become a $10 trillion gross domestic product (GDP) economy. However, this sector faces a major obstacle in the form of a large credit gap, amounting to over $500 billion, more than $100 billion of which exists for the small ticket loan segment,” said Anshul Agarwal, MD & co-head of consumer, financial institution and business service group at Avendus.
The NBFCs are considered to be better placed than banks because of their low cost branches and wide presence. They also fare better in sourcing customers and assessing customer repayment ability. Unlike banks which prefer safe customers, NBFCs are willing to understand and evaluate an undocumented industry and have their own collection team. They are also good in using technology to pull documents, conduct televerification and employ technology-related cash flow recognition.
“This credit gap is being addressed by high quality specialised NBFCs who are agile and nimble. We reckon that this segment is headed for a virtuous cycle. As the market matures and balance sheets become stronger, cost of funds will rationalise and operating expenditure will become less,” said Agarwal.
“We also believe that this segment is entering a virtuous cycle, and lenders, here will be able to generate 20% return on equity on a sustainable basis,” he added.
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