Wrong reporting hides small biz loans worth Rs 10 L crore

About Rs 10 lakh crore of loans to small businesses were mis-reported as personal advances made to their proprietors, said a report. These loans are usually backed by gold and property and have the lowest default ratios. According to the report by the Boston Consulting Group (BCG) on behalf of the Indian Banks’ Association and the Federation of Indian Chambers of Commerce & Industry, the size of the micro, small and medium enterprises (MSMEs) market in India is Rs 25 lakh crore.
The report splits the borrowings by MSMEs into two categories — in the name of the entity (which represents loans worth Rs 15 lakh crore), and in the name of the individual (which accounts for nearly Rs 10 lakh crore).

Most of these are taken in the name of the proprietor and family, and then channelled to support business needs.

BCG partner and director Yashraj Erande said, “We are seeing the MSME space at the cusp of undergoing the same transformation that retail lending did in 2008-09. The cost of underwriting small loans has come down because of Aadhaar and the digitisation effort by banks. For instance, the cost of delivering a mortgage-backed loan can come down by 60% because of digitisation.”



The report pegs the growth in advances to SMEs at 22% for new private banks, in line with non-banking finance companies (NBFCs) that are leading the growth in this space. The large private banks are lending primarily to small enterprises, which are witnessing highest growth among subsegments. Geographically, the states with lower MSME credit penetration show higher growth in MSME credit. Meanwhile, public sector banks are continuing their legacy of being the banks for the masses, with a large number of loans being sanctioned under the MUDRA initiative.

According to BCG principal Varun Kejriwal, the sweet spot in the whole MSME spectrum is loans in the mid segment of Rs 2 lakh to Rs 1 crore, and the nonperforming assets that are substantially lower than nano- and large-ticket loans. “Where banks have got their fingers burned is in the larger segment of above Rs 1 crore,” he said.

According to Erande, this is an opportunity for public sector banks as this segment will grow in its mid-teens compared to 10-11% average credit growth.