Over Threefold Growth In NBFC Credit To MSMEs Compared To Banks: RBI

Non-banking financial companies (NBFCs) have experienced major growth in loans extended to micro, small, and medium enterprises, surpassing that of traditional banks by over three times, according to a report released by the Reserve Bank of India (RBI). The central bank's latest assessment of the banking sector's performance for the fiscal years 2022-23 and 2023-24 highlighted the advantage NBFCs have gained in providing customized financing solutions.

The co-lending framework for priority sector lending has played a crucial role in facilitating credit flow from NBFCs to the MSME sector. This framework leverages the low cost of funds from banks and the extensive reach of NBFCs. In comparison to the 12.7 per cent and 12.4 per cent year-on-year growth in MSME credit by banks as of March 2022 and March 2023, NBFCs demonstrated robust credit growth to MSMEs, recording 21.2 per cent and 42.4 per cent, respectively.

Contributing To Financial Inclusion

The RBI report acknowledged that NBFCs have consistently expanded their MSME portfolio, addressing the sector's credit needs and contributing to overall financial inclusion and economic growth. Notably, services-oriented MSMEs constitute a significant share of NBFC credit to the sector, accounting for 66.6 per cent as of March 2023, while industrial MSMEs make up the remaining 33.4 per cent.

An earlier report from 2023 highlighted the increasing interest of NBFCs in tapping into the MSME segment due to heightened competition from banks in vehicle, gold, and home loans, coupled with sustained demand from small enterprises for credit.

Challenges Ahead

However, challenges may arise for NBFCs, as the central bank recently raised risk weights for various types of lending, including consumer credit and credit card receivables. The move, aimed at enhancing prudential norms, has been met with concerns from the Finance Industry Development Council (FIDC), a body representing NBFCs.

According to FIDC, this adjustment could inadvertently lead to a significant reduction in credit flow to crucial sectors such as MSMEs and self-employed individuals. Additionally, the increased risk weight is expected to raise the cost of funds for these sectors, potentially impacting their ability to invest in modernization and expansion post the Covid-19 impact.