India’s MSME base to grow to 7.50 crore units from 6.30 crore: Report
According to a report jointly published by SIDBI (Small Industries Development Bank of India) and TransUnion CIBIL, the landscape for Micro, Small, and Medium Enterprises (MSMEs) in the country is poised for growth.
The report highlights that the number of MSMEs is projected to increase from the current 6.30 crore entities. Among these, only 2.50 crore MSMEs have previously accessed credit from formal sources. However, the report predicts that the number of MSMEs will likely reach approximately 7.50 crore in the near future. This growth is anticipated to occur at an estimated compound annual growth rate (CAGR) of 2.5 percent.
Of the expected 7.50 crore MSMEs, a significant portion of around 5 crore entities is predicted to be categorized as new-to-credit (NTC) entities. This implies that they have not availed credit from formal sources previously. Lenders have a considerable opportunity to tap into this expansive segment by identifying deserving NTC MSMEs, establishing connections with them, and designing credit products tailored to meet their specific requirements.
The report, which delves into the MSME credit performance in the fourth quarter of the financial year 2022-23, underscores the potential for financial institutions to engage with and support these newly emerging MSMEs. By offering appropriate credit solutions, financial institutions can contribute to the growth and development of the MSME sector, thereby boosting economic activity and employment generation.
The report also emphasizes the importance of a dynamic approach by lenders in understanding the unique needs and characteristics of NTC MSMEs. Customizing credit products to suit their requirements can foster a supportive environment for these businesses to thrive. Additionally, it underscores the role of credit bureaus in providing accurate and relevant credit information that aids lenders in making informed lending decisions.
The projected growth of the MSME sector presents a significant opportunity for financial institutions to expand their lending portfolios, support business growth, and contribute to the economic progress of the country. This dynamic landscape calls for proactive engagement with NTC MSMEs and the development of innovative credit solutions that cater to their diverse needs.
According to data sourced from the National Sample Survey (2015-16) and reported by the Ministry of Micro, Small and Medium Enterprises (MSMEs), India had approximately 6.34 crore MSMEs. Among these, micro enterprises formed a significant majority, accounting for over 99 percent of the total MSMEs. Specifically, there were around 6.3 crore micro enterprises in the country. In contrast, small and medium units constituted a much smaller portion, comprising 0.52 percent and 0.01 percent of the total, respectively.
The classification of commercial loans at the entity level is based on various factors, including the aggregate credit exposure. The report highlights that micro enterprises are defined based on their investment, with an investment threshold of less than Rs 1 crore. Within the micro enterprise category, there are further subdivisions into three sub-categories:
- Very Small: Micro enterprises with credit exposure under Rs 10 lakh.
- Micro 1: Micro enterprises with credit exposure ranging between Rs 10 lakh and Rs 50 lakh.
- Micro 2: Micro enterprises with credit exposure between Rs 50 lakh and Rs 1 crore.
These sub-categories reflect varying levels of credit exposure and investment sizes within the micro enterprise segment. The report’s categorization provides a framework to understand the credit needs of different types of micro enterprises and tailor financial products accordingly.
It is important to note that micro enterprises play a pivotal role in the Indian economy, contributing significantly to employment generation and economic growth. Recognizing the diverse characteristics of micro enterprises, including their investment sizes and credit requirements, is crucial for designing effective lending solutions that cater to the unique needs of these businesses.
The emergence of New-to-Credit (NTC) entities is expected to be a driving force in the next phase of growth for Micro, Small, and Medium Enterprises (MSMEs), as highlighted in the report. In the fourth quarter of the fiscal year 2022-2023 (FY23-Q4), NTC borrowers constituted a substantial portion of new loan originations in the MSME lending landscape, accounting for 56 percent of such originations. This trend was particularly evident within the micro segment, where NTC borrowers contributed to more than 61 percent of loan originations.
The micro segment, in particular, witnessed a notable demand for commercial loans from NTC borrowers. This surge in credit demand within the micro segment, combined with a positive outlook from lenders and robust demand dynamics, has been a significant factor driving the growth of NTC borrowers. This trend is deemed to have a positive impact on enhancing financial inclusion by facilitating credit access for a broader range of businesses.
Among the NTC borrowers, a significant proportion comprises retail traders. These retail traders represent the largest segment of NTC borrowers seeking commercial loans. The inclusion of such diverse enterprises into the formal credit system contributes to fostering an environment of inclusive growth and supporting the expansion of MSMEs, which play a pivotal role in India’s economic landscape.
Overall, the rise of NTC borrowers, especially within the micro segment, is viewed as a crucial factor in the next wave of MSME growth, demonstrating the evolving dynamics of credit demand and financial inclusion in the sector.
