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Banks losing share to NBFCs in MSME credit

As per the research analysts of the Reserve Bank of India,the share of credit provided by banks to micro, small and medium enterprises (MSMEs) has declined since September 2016.

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Why in the news ?

  • As per the research analysts of the Reserve Bank of India,the share of credit provided by banks to micro, small and medium enterprises (MSMEs) has declined since September 2016.
  • Whereas the share of loans by non-banking financial companies (NBFCs) nearly doubled to 10 per cent between December 2015 and March 2018.

More on news

  • Scheduled commercial banks’ (SCB) share in MSME credit has fallen from nearly 95 per cent in December 2015 to 90 per cent in March 2018.
  • Between 2014 and 2016, the deceleration in bank credit growth to MSMEs was as a result of an overall slowdown in economic activity, rising bank NPAs and reclassification of food and agro-processing units from the MSME category to the agriculture sector.
  • A significant fall in MSME credit growth in late 2016 was attributed to demonetisation, as credit growth fell significantly and turned negative during November 2016-February 2017.
  • However, loans extended by NBFCs to MSMEs grew rapidly at an annual average rate of 35 per cent between December 2015 and March 2018.
  • The divergent experiences of banks and NBFCs in terms of asset quality explains the difference in credit growth

Non-Banking Financial Company (NBFC)

  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government
  • NBFCs provides banking services without meeting the legal definition of a bank.
  • Unlike Banks , NBFC cannot accept demand deposits. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

MSMEs

  • Classification : ( As per the MSME development Act 2016 )
  • Micro Enterprise : investment uptoRs.25 lakhs
  • Small Enterprise :Investment above Rs.25 lakhandupto Rs.5 crore
  • Medium Enterprise : investment above Rs.5 crore and upto Rs.10 crore
  • The MSME sector comprises more than 63 million units and employs about 111 million people.
  • The share of MSMEs in GDP is about 30%, with the sector accounting for about 45% of manufacturing output and about 40% of India’s total exports.

Source

Indian Express
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