New to credit entities will drive next phase of MSME growth

New to credit (NTC) MSMEs, composed of first-generation entrepreneurs and initial forays into the world of borrowing, are seeking financial support for business expansion and technological advancements. 

Among the expected extensive spectrum of 7.5 crore Micro, Small, and Medium Enterprises (MSMEs), an estimated 5 crore belong to the NTC segment, representing businesses new to formal credit.

NTCs play a pivotal role in advancing the cause of financial inclusion. Lenders can unlock significant growth by identifying deserving NTC MSMEs, establishing connections, and tailoring credit products to meet their unique needs. This segment not only offers the promise of deeper credit penetration, but also holds the potential to outshine existing credit-availing businesses. With an eye on substantial portfolio growth, NTCs emerge as a strategic target market, paving the way for an exciting journey into uncharted territory.

Charting the NTC territory

● The majority of NTC borrowers are retail traders, with over half of them initially taking small-ticket loans. Businesses with debts ranging from Rs 50 lakh to Rs 1 crore subsequently tended to receive more loans compared to those that borrowed less than Rs 50 lakh.

● As of 2021, millennials constituted the largest segment of NTC individuals, accounting for 42% of the total, closely followed by Generation Z at 29%.

● NTC consumers were more prevalent in rural or semi-urban areas in India, making up 67% of the total in 2021, compared to the 57% share of NTC accounts in these regions.

● The percentage of NTC consumers in rural areas increased from 30% in 2017 to encompass 34% of the entire NTC consumer base by 2022.

● From 2017 to 2022, the representation of women among NTC consumers in India remained relatively steady, fluctuating between 32% and 34%.

Digital evolution of MSME credit

The requirement for credit in MSMEs is increasing due to enhanced business operations, better access to credit data, and the rapid integration of digital lending practices. Remarkably, a substantial 72% of transactions within the sector are presently conducted digitally, leaving just 28% involving cash. Acknowledging the opportunities in this field, non-banking financial companies (NBFCs) and fintech firms are actively aiding MSMEs in obtaining credit. In 2019, NBFCs were responsible for 40% of new loan accounts in different segments.

Fintech companies are also venturing into credit card offerings, personal loans, and unsecured loans without guarantors while exploring innovative models like ecommerce credit. This surge in digital adoption paves the way for further sector growth, with FY23 witnessing 9,192 crore digital transactions till December 31, 2022.

Supply Chain Finance (SCF): A catalyst for MSME expansion 

Corporations have recognised that their future success hinges on multiple stakeholders. To empower MSMEs and instill confidence in first-time entrepreneurs, they increasingly adopt multi-tier Supply Chain Finance (SCF) programmes managed in-house or by third parties. 

Out of the vast MSME landscape, approximately 10 million enterprises manage to secure financing from formal sources, accounting for 40-50% of the total credit extended to this sector. The remaining MSMEs resort to informal sources of finance, often burdened with exorbitant interest rates. SCF offers a gateway for MSMEs to access substantial bank credit, primarily based on the strength and volume of their trade activities. This access to credit comes at significantly lower interest rates than they could secure based solely on their business and financial standings. 

SCF offers a cost-efficient avenue that empowers MSMEs to seamlessly fulfill their working capital requirements. It acts as a catalyst, nurturing the growth and progress of MSMEs by providing them with convenient access to financial resources. 

In this way, SCF facilitates economic growth and propels smaller enterprises towards medium-sized businesses.

Bottomline

The FY 23-Q4 data highlights the burgeoning role of NTC entities in reshaping MSME credit growth. With a substantial 56% of originations coming from NTCs, it's evident that they are poised to define the next phase of MSME credit expansion.

In the micro-loan category, NTCs have contributed over 61% of originations, especially benefiting those seeking smaller loans. Moreover, SCF reassures lenders that both the buyer and the seller will uphold their responsibilities and that the final purpose of the funds has been defined.

Nevertheless, fully realising these opportunities hinges on the seamless integration of public digital infrastructure and regulatory alignment. As these elements fall into place, it anticipates a transformative era in MSME financing, with NTCs driving growth, innovation, and economic empowerment for many entrepreneurs and small businesses.