MSME lending is leading growth in banking space at 22%, with the total value of MSME digital lending to touch $250Bn in next five years, according to the Boston Consulting Group (BCG), one of the world’s leading management consulting firms. The Annual FIBAC Productivity Report on Indian Banking Industry titled: 'Providing Financial Services to SMEs in an Increasingly Digital Ecosystem' reflects where the Indian banking industry stands in the new era with the advent of fin-tech companies, e-commerce, big-data, and cloud, digital is transforming millions of lives.
Saurabh Tripathi, Senior Partner & Director, APAC Regional Practice Leader – Financial Institutions, BCG said, “It is a privilege to be associated with FIBAC for eight years; and this year has been very interesting for us. With its own share of challenges to tackle on NPAs or the agility in adopting emerging technology to enhance access and create a digital banking ecosystem, the banking industry is overhauling for good. Moreover, digital enabler models boosting MSME lending and alternate credit scoring models have revolutionized the lending space in India.”
Yashraj Erande - Partner & Director, BCG said, “MSME lending can be the largest source of value creation for the financial services industry as well as India as a nation. It’s both an obligation and an opportunity whose time has come. It will have a multiplier effect on the country’s GDP.”
Rashesh Shah - President, FICCI; Chairman and Chief Executive Officer, Edelweiss Group said, “Timely availability of credit has been the biggest issue for MSMEs. For long credit was not democratised but over the last 10 years there has been an evolution of information bureaus and an important role played by rating agencies. With massive digital footprints being created we are looking at a dramatically changed scenario now. Technology will play a big role in the rapid evolution of the credit ecosystem over the next 5-10 years and is expected to transform the Indian economy.”
The report reveals that banking revenue pool is growing at 8% which is driven by strong fee income growth of 14%. On deposit front, in overall banking industry, there will be slowdown in growth in FY18. Savings account balances will continue to outgrow current account balances.
VG Kannan, Chief Executive Office, Indian Banks’ Association said, “At IBA, we are committed to promote responsible credit and I believe there is need to establish a robust framework that help lenders and consumers to utilize the access to finance responsibly. The BCG report reveals various progresses that industry has made like digital adoption, MSME finance opportunity, which gives necessary clarity on steps that need to be taken to ensure financial accountability and yet maximize opportunity for industry growth.”
After recording 17% growth, post demonetization, growth in balances slowed down to 7%. This is result of muted growth in all segments – Individual, Corporate and MSME.
PSUs, New Private and Old Private banks are showing different business models. With focus on masses, large PSU banks have the largest number of savings accounts driven by the larger branch network; new private banks have been largely successful in capturing high-value savings accounts, on the other hand, old private banks are neither showing focus on premium segments nor on masses.
BCG’s report has identified that auto loans are witnessing strong revival post demonetisation. In FY17, due to demonetization, financing of auto loans had seen a slowdown. This had resulted in a pent-up demand in FY18. Gradual return of the liquidity situation to normalcy has led to a release of a pent-up demand and a robust 24% growth in auto loans in FY18.
The report lists out certain trends in MSME Lending:
- Advances to SMEs growing at 22% for private – new banks in line with NBFCs leading the growth in this space
- Within MSMEs, Private – New banks’ lending primarily to small enterprises
- Advances to small enterprises witnessing highest growth among sub-segments
- States with lower MSME credit penetration show higher growth in MSME credit
- Robust growth in fee income seen, other income lags due to trading losses
- Banks leveraging growth in mutual funds to boost fee income
- Assets under management contributed by retail segment grew at a CAGR of 32% from FY14 to FY18
Imperatives for banks includes managing NPAs and Stressed Assets. The key imperatives are:
- NPA situation continues to worsen; however, high variability seen in asset quality of MSMEs and corporates
- In MSME advances, loans to medium-sized enterprises have highest gross NPA of 16%
- Retail advances with lowest slippages (2%) and highest upgradations (21%) in FY18
- Banks with highest centralized credit and risk staff having lowest NPAs
For this report, with representative sample size of more than 2600 respondents, BCG factored 34 banks across four segments – 15 medium PSU banks; six large PSU banks and five new private banks.