Banking Article, Banking Finance 2021, Banking Finance July 2021

MSME Lending: PSBs locking horn with Private lenders & NBFCs

MSME sector has been the driving force for the overall growth and development of the entire world and our country has not been an exception. With the advent of digital drive as well as paradigm shift in the industrial blueprint of our economy, still MSME sector continues have a paramount importance in it. The dependency of our economy on this single sector can be emphasized from the fact that MSME sector has a vast as well as single largest network of 63.38 million enterprises, which in turn contributes towards 45% of manufacturing output, and more that 40% of exports. As a single sector, it contributes for over 28% of GDP employing around 111 million people, which is only second to the agriculture sector. The above factors speaks the volume of contribution of MSME in the building of the nation but still as per RBI data this sector has potential to grow at much faster rate and provide boost to our manufacturing sector. The recent manufacturing policy envisages the contribution of manufacturing sector growing from a level of 16% to 25% by the end of 2022.

The contribution of MSME sector to the economy can be well enumerated from the below mentioned table:

2011-12 2622574   8106946 32.35 8736329 30
2012-13 3020528 15.17 9202692 32.82 9944013 30.4
2013-14 3389922 12.23 10363153 32.71 11233522 30.2
2014-15 3704956 9.29 11504279 32.21 12467959 29.7
2015-16 4025595 8.65 12566646 32.03 13764037 29.2
2016-17 4405753 9.44 13841591 31.83 15253714 28.9

Source: Annual report of MSME DEPT.

PSBs play a major role in driving the MSME sector by providing the need based as well as timely advance. The share of 21 public sector banks (before amalgamation) had fallen to 50.7 percent as of June 2018 from 55.8 percent in June 2017 and 59.4 percent in June 2016 as per quarterly report submitted by CIBIL and SIDBI. During that period MSME sector registered a growth of 16.1%. If we can compare the PSBs with peer private bankers, we can find a very contrasting feature. Until December 2018, When the PSBs registered a growth of 5.5percentand the peers registered a mammoth growth rate of 23.4%.Major factor towards the drop of market share of PSBs is the gain in momentum by private peers as well as NBFCs apart from various other reasons, which comprises of institutional, systemic as well as policy level. During the above period, the private peers registered a market share of 29.9 percent as well as NBFCs registered 11.3 percent market share.

Going forward if we analyze top public sector lenders for the trend of growth then the result may seen skewed towards private lenders and NBFCs. The below mentioned table will depict the performance of the top six public sector lenders and to have a better understanding we can compare with top three private lenders.

STATE BANK OF INDIA 2325290 267614 11.5 14.71 6.37
PUNJAB NATIONAL BANK 495000 65171 13.16 -18.21 1.02
BANK OF BARODA 690121 87328 12.65 57.47 47.2
UNION BANK OF INDIA 346921 70381 20.28 8.01 6.61
CANARA BANK 451223 78773 17.37 -7.51 1.57
INDIAN BANK 205890 37208 18.07 12.59 9.57
HDFC BANK 993703 159108 16.01 23.36 22.01
ICICI BANK 676290 70878 10.48 13.64 10.92
AXIS BANK 571424 61921 10.83 -6 15

Source: Website of various banks, RBI data bank

Ray of hope:

  • Public sector banks (PSBs) had been losing market share continuously over a long period of time. Surge in both NBFCs and private banks market share had been the reason for PSB segment losing its share. However, in the quarter ending Dec ’19, public sector banks have gained market share in MSME lending, for the first time in the past few years. As of Dec’19, PSB market share stood at 49.8% in overall MSME lending book, with highest market share in Micro segment at 59.2%.
  • Lenders disbursed 92,262 crores worth of fresh credit towards the Micro segment. While private banks and public sector banks have roughly similar share on fresh credit disbursed in the Micro segment, the growth trends differ significantly when analyzed at a granular sub-segment level.
  • The total on-balance sheet commercial lending exposure in India stands at 64.45 lakh crores as of Jan ’20, which was 64.04 lakh crores in Dec ’19. Of this, MSME Segment is at 17.75 lakh crores credit exposure as of Jan’20. Important to note that MSME segment has observed lowering of credit exposure across most sub-segments of MSME lending in the last few quarters. Large corporate segment is at 46.7 lakh crores credit exposure and has observed a YoY expansion of 6.3%.
  • The prominent factor for reduction in credit exposure towards MSME is reduced utilization in working capital limits attributed by COVID-19 related stress. If we analyze at granular level the drop in utilization is much higher in private banks than the public sector lenders. The reason being the penetration of public sector lenders to micro segment of MSME as well as granular advance structure instead of focusing on mostly corporate.

For analysis if we take the data for December 2019 the utilization of working capital limits for PSB was at 80% for micro segment,76% for small segment and 69% for medium. The same data for private lenders are at 53%, 55%and 49% respectively for micro, small and medium segment for MSME. These are pre COVID-19 figures and are bound to deteriorate going ahead for few quarters even though PSBs fare high in this criteria.

  • In the last few quarters, Private Banks and NBFCs have strongly competed with Public Sector Banks in regaining a larger share of the MSME sector. However, that trend has started to change in Dec ’19 quarter with Public sector banks having regained market share from 48.2% in Sept ’19 to 49.8% in Dec ’19. The analysis below will show the fighting back from the PSBs even in the pandemic.
  • PSBs continue to be the dominant contributors in providing credit to Micro segment borrowers, holding almost 60% share in this segment. PSBs are playing a critical role in enabling financial inclusion of Micro Enterprises. The share of PSBs and Private Banks in the Small segment of borrowers is the same, with each having a market share of about 44%. Medium segment, which has the larger ticket size MSME loans, is again dominated largely by PSBs.

For an example we can take the micro segment where the domination of PSBS are mostly attributed to wide spread penetration as well as being the torch bearer of all kinds of Govt Sponsored schemes. It is a well known fact that Public sector lenders are the preferred outlet for all developmental projects of Govt .

What are the major strengths of PSBs for MSMSE lending?


  • The major differentiating factor between PSBs and private lender was use of technology. The EASE reform agenda has started a mission to create a brand PSBs and now for last few years PSBs are more and more becoming tech savvy. They have started using AI, chat bots, algorithm based financing etc. The trend will definitely help banks to leverage technology to carter to MSME. Already few banks have tied up with different fintech companies to provide end to end solution and seamless financing activity.PSB command the largest market share in terms of customer base. If they can leverage on big data analysis which is the need of the hour it can prove to be game changer for them.
  • With more than 1.5 lakh outlet PSBs share a mammoth presence and with more than 33% outlet in rural area they can leverage for more business in tier 3 to ties 6 cities. Data shows going ahead these centers will add to growth of financial institutions.
  • With the induction of fresh blood into the stream PSBs are shedding the legacy problems and are getting younger by reducing the average age of staff complement.
  • Learning from the mistakes PSBs are now coming out with more differentiated products suiting to needs of different segments of MSMEs which will enhance the experience and reduce the turnaround time creating a wow factor for the customers.
  • The synergy achieved by amalgamation of PSBs will also be a positive factor where they can exploit the economies of scale and large clientele base. With increase in size and enough capital base they will be ready to take on private peers. 

Going ahead:

The impact of COVID-19 and prolonged lock down will have serious ramification in the MSME portfolio of all the players in the segment. A deeper analysis will reveal the quantification of the slowdown but with the strength of PSBs they can better manage the situation than the peers. The major factor that will make the PSBs stand out is their penetration to rural economy in tier 3 to tier 6 cities. The recent focus on EASE reform agenda has started a sea change in the culture of PSBs and now they are also leveraging new technologies like big data analysis, AI etc. With the proper utilization of technology PSBs can regain the lost glory which is already evident from the results for last few quarters.

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