According to rating agency ICRA, the portfolio of loans against property (LAP) given by NBFCs has grown four-fold in five years to Rs 64,200 crore in March 2015 from Rs 16,600 crore in March 2010. LAP is predominantly availed by promoters of small and medium size units for business operations.
“The needs of the customers are diverse, throwing up need for focused institutions. It will be difficult for one large entity to address needs of all segments, so different smaller entities, finance companies, Micro-Finance Institutions (MFIs) etc are evolving to meet diverse needs,” said V Vaidyanathan, chairman, Capital First.
Vaidyanathan said that natural specialisation of labour is under way. This is why he sees finance companies focusing on SMEs and MFIs on micro loans.
The way banks and NBFCs asses cash flows is what sets them apart, as per analysts. Banks look at the balance sheets and accounts to make a credit decision. NBFCs on the other hand tend to also factor in the potential of the company besides other assets. Many a times SMEs under-report turnover, a factor that NBFCs are able to accomodate.
Lending to SMEs gives lenders higher margins. While margins for banks could go up to 4-5%, in case of NBFCs it could be around 8%, as per industry executives.
B Hegde, managing director at Vistaar Financial Services explains that spreads are better but the costs are high too. NBFCs incur higher costs to serve SME customers at distant places. They also have to keep higher provisions for likely defaults.
Bangalore-headquartered Vistaar's loan book has more than doubled in 12 months to Rs 515 crore and it expects to maintain the same pace in 2015-16, Hegde said.
Vistaar extends loans upto Rs 1 crore to MSMEs in services and manufacturing sectors.
Unlike home loans, likely loss from the SME business can’t be ascertained. These probable losses cannot be judged over 2-3 years as loan portfolio has to season out. But despite the uncertanities, new players are venturing out in this segment.
“In India there is a huge SME and MSME market due to which there is a big opportunity there. We have started lending to SMEs and these are the initial days for us as we started in this fiscal itself. Slowly and steadily in a calibrated manner we will grow the portfolio. We are currently lending to Maharashtra,” said R Venkatraman, managing director of India Infoline.
Few NBFCs are also eyeing SME clients that planning to set up in India.
Sam Ghosh, ED, Reliance Capital estimates that the target market for Japanese SME clients looking to set up operations in India is between $50 million to $500 million.
“Discussions have been initiated with 4-5 clients but no deals has been executed yet. When the Mumbai-Delhi industrial corridor picks up, we will see a large number of SME clients coming to India. Our estimates indicate that investments in this corridor alone would be about Rs 60,000 crore,” he said.
According to a report by International Finance Corporation (IFC), there is a total finance requirement of $650 billion in the MSME sector, which comprises of $520 billion of debt demand and $130 billion of equity demand.