NBFCs Steer MSME Lending Boom, Outshining Banks

In recent years, Non-Banking Financial Companies (NBFCs) have made significant strides in lending to Micro, Small, and Medium Enterprises (MSMEs), outpacing both private and public sector banks. According to CareEdge Ratings, NBFCs recorded an impressive 32% compound annual growth rate (CAGR) in MSME lending between 2020-21 and 2023-24. This growth is notable given NBFCs' smaller base compared to their banking counterparts.

CareEdge Ratings highlights a significant rise in the share of MSME credit within NBFCs' loans, increasing from 5.9% in 2020-21 to 9.1% in the first half of 2024-25. In contrast, banks maintained a stable MSME loan portfolio, hovering between 16.2% and 16.9% during the same period.

Projections indicate that NBFCs will continue their robust growth trajectory, expected to expand by 20% in the forthcoming years, with private banks growing at 15% and public sector banks at 10%. By 2025-26, NBFCs' assets under management in the MSME sector could exceed Rs 5.3 lakh crore, based on an estimated loan portfolio of Rs 4.4 lakh crore for 2024-25.

This surge in lending is attributed to an enabling ecosystem bolstered by initiatives like Udyam registration, GST Sahay, and TREDS, alongside advancements in digital public infrastructure, as reported by CareEdge Ratings. India's burgeoning MSME sector, consisting of approximately 63 million enterprises, presents a lucrative growth potential exceeding Rs 18 lakh crore.

The ongoing formalisation of the economy and the increasing incorporation of digital technologies are expected to shift a substantial portion of informal credit demand into the formal financial system.

(With inputs from agencies.)