Non-bank lenders 'LAP' up opportunity to tap MSMEs
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Mumbai: Non-bank finance companies have stepped up lending to micro, small and medium enterprises ( MSMEs ), with the rate of growth in such advances outpacing commitments by commercial banks to this category of borrowers.To be sure, non-bank lenders are focusing on collateral-backed loans below '10 lakh-a space and ticket-size banks might not find too attractive for direct lending.In the absence of banks, which focus on loans of '15-20 lakh, NBFCs are finding growth opportunities in the high yielding micro-LAP (loan-against property), which are sub-'10 lakh loans. Industry executives said that there are growth opportunities given that the MSME sector remains starved for credit. Kirti Timmanagoudar , head of strategy and co-lending at IIFL Finance , said that most micro-LAP borrowers are from economically weaker sections and low-income groups. These borrowers may not have the conventional documents that banks seek, hence, underwriting has to go beyond traditional methods such as assessments of inventory to estimate cash flows."This is where NBFCs have developed expertise with on-field experience in dealing with small units in different clusters across the country. Additionally, for banks secured loans below '10 lakh do not qualify as PSL (priority sector lending)," Timmanagoudar said. "We have seen a section of microfinance borrowers graduating to retail loans and the micro-LAP product is a logical first step. We take residential property as collateral, which acts as a moral obligation for the borrowers to make timely repayments."According to a recent study by Small Industries Development Bank of India, while there has been an increase in credit supply to MSMEs, the sector still has an addressable credit gap of about Rs30 lakh crore.The share of MSME credit in NBFCs' overall loan portfolio rose from 5.9% in FY21 to 9.1% at end of September 2024. In the same period, banks maintained relatively stable MSME exposure, in the range of around 16-17%, according to a report by rating agency CareEdge . MSME lending by NBFCs grew 32% annually compared to 21% for private banks and 10% for the public sector banks between FY21 and FY24, it said.Though NBFC growth is on a smaller base, government initiatives like Udyam registration, GST Sahay , and credit guarantee schemes, among others, are giving confidence for lending, said industry executives.NBFCs command as high as 45% market share in the micro-LAP segment. The loans are given with self-occupied residential or even commercial property as the collateral. This is also a high yielding business, ranging 16-18%, because operational expenditure and credit costs tend to be on the higher side.The MSME Loan Against Property (LAP) market has grown over 50% from '7.5 lakh crore to '11.3 lakh crore over the two years ending September 2024.Within this market, the micro-LAP rose by 60% to '1.6 lakh crore in the same period, according to CareEdge report.The ratings agency expects this segment to be 25% each in FY25 and FY26.
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