MSME Sector Gains Confidence of Lenders, Brighter Future Expected

Mumbai: The current pace of the Indian economy has seen a significant contribution from India’s micro, small, and medium enterprises (MSME). In the years following the COVID-19 pandemic, this sector has been progressing rapidly. During the financial years 2021 and 2022, the share of MSMEs in India’s Gross Value Added (GVA) has also increased significantly.

U Gro Capital and Dun & Bradstreet have presented a joint report titled ‘MSME Sampark Bi-Annual Report on the latest in the MSME lending ecosystem’. This report sheds light on the current situation of India’s small and medium-scale industries post the impact of the COVID pandemic. Additionally, the report discusses the status of debt in this sector post-pandemic, how much loan these small industries have received from banks and other financial institutions, and the size of the loans they get. The report indicates a ray of hope for a better future. It mentions signs of strength in domestic demand and profits. Furthermore, the report suggests that in the coming times, there may be an acceleration in capital expenditure by MSMEs. Additionally, MSMEs are also preparing to make a significant contribution to the employment sector.

Presenting the report, Shachindra Nath, Founder and Managing Director, U GRO Capital, said: “This report highlights the critical role that MSMEs play in shaping the destiny of the Indian economy. It takes a deep dive into the nuances of the MSME sector, shedding light on its resilience, innovation, and the pivotal role it plays in fostering economic growth and employment.”

Avinash Gupta, MD & CEO – India, Dun & Bradstreet, said “India aims to be a US$30 trillion economy by 2047, roughly 8x increase in two decades. MSMEs contribute nearly a third of India’s GDP. It is imperative that MSMEs scale up significantly and quickly, necessitating estimated US$11.5 trillion financing requirement in fixed assets. The MSME Sampark report jointly produced by Dun and Bradstreet and UGRO Capital aims to track MSMEs performance, credit behaviour and financial environment on a bi-annual basis. We have observed that businesses optimism of MSMEs has soared to the highest level since 2022, indicating improvement in performance even in the face of difficult external environment. Moderate delinquency rates and low sector risks have also improved MSMEs borrowing prospects. The Government’s continued thrust on formalization is furthering the formal credit penetration in the sector.”

Recovered from the ravages of Covid, MSMEs are back on track:

Post-pandemic, India has emerged as one of the fastest-growing major economies. Real Gross Domestic Product (GDP) of India has grown by more than expected 7.6% in the July-September quarter of 2023 compared to the base year (2011-12). For the entire financial year, it is expected to register a growth of 7.3%, compared to 7.2% a year ago. The report highlights that after the pandemic, small enterprises witnessed good recovery, although the pace is currently slower compared to that of larger units. The report reveals that more than 50% of entities with turnover less than Rs 10 crore have recorded a growth rate of 10%. The study, conducted over a period of three years, examined over 25,000 MSMEs. It was found that there was a significant downturn in trade and sales across the country during the pandemic. However, post-pandemic, 77% of MSMEs have resumed operations. Moreover, more than 68% of MSMEs have recorded sales growth of more than 10% year-on-year in subsequent years. This growth has led to a reduction in risk levels and improvement in default rates in the MSME sector. Consequently, there’s an improvement in the likelihood of MSMEs accessing loans. As a result, there has been an increase in the loans provided by banks and non-banking financial companies to MSMEs.

Credit Status of MSMEs:

According to the report, MSMEs are feeling the need to obtain formal recognition to further progress. This will help them avail loans from formal institutions (banks and NBFCs) and benefit from various ongoing and future government schemes. Since the inception of entrepreneurship in 2020, MSME registrations on the platform have increased by 2.4 times, while they have generated 1.6 times more employment opportunities by the financial year 2023.

Widening Reach of Loans:

With the expanding scope of the MSME sector, there is a growing interest from banks and financial institutions. The government is actively working towards formalizing the MSME sector. India’s credit penetration of 52 per cent is the lowest among its Asian counterparts. Comparatively, China leads with 185%, followed by South Korea with 175%, and Vietnam with 126%. In fact, in most Indian states, the credit-to-GDP ratio is below the national average. States like Maharashtra, Telangana, Tamil Nadu, and Delhi have credit-to-GDP ratios above the national average. Now, both the central and state governments are working towards formalizing MSME sector through direct and indirect incentives. This is expected to benefit MSMEs with increased opportunity for formal loans.

Increasing Ticket Size of Credit:

After COVID-19, there has been a significant increase in loans provided to MSMEs by lenders. The size of loans extended to businesses has also increased, while there has been a reduction in approval rates after government cut relief measures announced during the pandemic. This indicates that banks are now cautious in extending loans after the government cut relief measures. Maharashtra, Gujarat, and Delhi are leading states in terms of loan distribution. In terms of industries, sectors like light engineering, hospitality, and healthcare have attracted the most debt.

Key Highlights of the report

• Global growth slowed markedly in 2023, and we expect growth to remain subdued in 2024. With a growth rate of 7.3% in FY23, India is poised for a strong growth in FY24.
• We understand that a robust MSME activity will be pivotal to India’s growth story.
• MSME sector in India continued to demonstrate resilience and growth. Since its inception in 2020, MSME registrations on UDYAM have increased by 2.4 times by FY23, while they have generated 1.6 times more employment opportunities.
• Despite the ongoing global economic slowdown, the optimism level among small businesses persists reaching a peak in Q4 2023, the highest since 2022.
• Dun & Bradstreet’s proprietary risk rating score of MSMEs indicate that risk to MSMEs moderated in 2022 compared to 2019.

• Low risk in the MSME sector and declining delinquency rates are enhancing the borrowing prospects for MSMEs. Both SCBs and NBFCs share of credit to micro and small firms has increased in FY23 compared to the pre-pandemic period.
• Post pandemic, ticket size of loans by lenders to MSMEs has increased while approval rates have fallen indicating cautiousness after the removal of pandemic relief measures.
• The drop in the approval rate is greater in PSUs for both the medium risk and high-risk firms while NBFCs remain the most cautious for the high-risk firms.

Highlights of the sectors covered in the report:

Light Engineering:

In MSMEs, the market size of enterprises in segments like iron, steel, and other metals is the largest. It is also the most efficient sub-sector in terms of debt to total turnover ratio. Enterprises in this segment can be found throughout India, although the role of Maharashtra is most significant. Additionally, Gujarat is the primary market for plastic/glass/ceramic products.

Food Processing

In the MSME segment, the food processing sector contributes significantly. Animal or vegetable fats/oils and wax, edible items, fruits, and grains are major contributors to the food processing sector. Cash transactions are highest in this segment compared to other sectors. Its presence is throughout India, with Maharashtra, Gujarat, and Rajasthan being its dominant markets.

Electrical Equipment

Various appliances, heavy equipment/office machines, electric circuit components, and electronics equipment used in communication are the other dominant sub-industries. It has a pan-Indian presence, with Maharashtra being the primary market. Meanwhile, Gujarat and New Delhi are key category hubs.

Chemical Industry

Half of the business in this sector comes from organic chemicals, inorganic chemicals, and fertilizers. Chemical Industry’s reach is throughout India.

Healthcare Sector

Healthcare delivery and services (dealers, distributors, hospitals, diagnostic centers) hold a significant stake in the market. Similar to other sectors, small institutions such as dental clinics, eye clinics, and pharmacies require funding for development, which can be fulfilled through various business loans and financing solutions.

Auto Components

Vehicles and vehicle parts contribute significantly to the auto component industry. While hotel, food, transportation, and public services make up a large part of this industry’s market. This industry has a large share of total credit.