MSMEs in India Face Rs 134.40 Lakh Crore Funding Need, NBFCs Lead Growth

India is home to about 64 million Micro, Small, and Medium Enterprises (MSMEs). According to a recent report by CareEdge, the total funding requirement for this sector is projected to reach ₹134.40 lakh crore. Out of this, the total debt demand is estimated at ₹106.11 lakh crore. Formal funding sources like banks and Non-Banking financial Companies (NBFCs) are expected to cover ₹56.24 lakh crore, which is 53% of the total debt demand.

Despite this, there is a significant credit gap. With the current supply of ₹280 lakh crore (based on FY24 projections), the gap is about ₹28.24 lakh crore. As India’s economy continues to formalize, demand currently met through informal funding is expected to shift towards formal institutions, potentially increasing the credit gap to ₹78.13 lakh crore.

NBFCs are becoming key players in MSME lending. They saw a threefold year-on-year growth in FY23, outpacing public sector banks (PSUs) and private sector banks (PVBs). This trend is expected to continue, with NBFCs, private sector banks, and public sector banks projected to grow at 25%, 15%, and 10% respectively in FY24 and FY25.

The asset quality in the MSME sector has improved across all lender categories and MSME sub-segments. However, NBFCs focusing on smaller loans might face lower profits due to narrower Net Interest Margins (NIMs) and higher credit costs from new and unsecured loans.

Over the past five years, private sector banks have shown a strong interest in MSME lending, achieving an annual growth rate of 18%, while public sector banks have grown by 5%. This shift is driven by the pursuit of better yields and improving asset quality, leading private banks to focus more on MSME lending.