Banks cautious on lending to small businesses despite high demand, low NPAs

Lenders are cautious on providing loans to the micro, small and medium enterprises (MSME) segment, despite high demand, availability of analytical data and lower delinquencies, a report said on Thursday.

Demand for loans from MSMEs grew 33 per cent in the January-March period of the previous fiscal (Q4, FY23) compared to the year-ago period, but the supply of credit was up by only 11 per cent during the quarter, the report by credit information company Transunion Cibil, in association with Sidbi, said.

"Credit flow to the MSME sector is slower compared to the increasing demand as lenders follow a cautious approach on commercial lending," the report said.

The reluctance of banks is despite the availability of analytical data, which gives more comfort to a lender while taking a decision, and a sharp improvement in asset quality in the segment.

The report said unpaid loans between 90 and 720 days improved to 2.4 per cent in Q4 FY23 as against 2.9 per cent in the year-ago period.

"Bridging the demand-supply gap is a priority call-to-action for lenders. With rising demand, improved credit performance and promising economic growth prospects, the time is conducive for lenders to expand their MSME credit portfolios," Cibil Managing Director and Chief Executive Officer Rajesh Kumar said.

The report said the average borrowing by MSMEs has decreased, especially in the Rs 1 crore-plus segment.

State-owned banks' average ticket sizes reduced by 21 per cent in the fourth quarter of FY23, while the same for private sector banks fell 7 per cent, it said.

"Conservative approach by lenders, low risk appetite and higher cost of collections have resulted in the decrease in average loan size at public as well as private sector banks," it said.

Private sector lenders continue to be leaders in the commercial lending segment as a whole, while state-run ones lead in the "micro" segment within it, the report said.

Commercial lending to MSME entities continues to be concentrated in the states that have higher industrialisation, it said, adding that Karnataka and Uttar Pradesh grew fastest in terms of originations.