MSME Credit Growth: A Shifting Landscape

Slowdown for Small Businesses, Growth for Medium and Large

The latest MSME Sampark Report reveals a changing credit landscape for businesses of different sizes. While credit growth for micro and small businesses saw a dip, falling to 10.1% in November 2024 from a healthier 15.5% in May 2024, medium and large businesses experienced more positive trends. Medium-sized firms saw a significant jump, with credit growth surging to 20% in November from 12.6% in June. Large businesses maintained steady credit growth throughout the period.

This insightful report, a joint effort by Ugro Capital and Dun & Bradstreet, is based on an extensive analysis of over 45,000 enterprises across seven diverse sectors, spanning the years 2021 to 2024.

Sectoral Trends and B2B vs. B2C Borrowing

The report spotlights key borrowing trends across different sectors. Light engineering, electrical equipment, food processing, and chemicals emerged as the top borrowing sectors during the first three quarters of 2024. An interesting divergence also appeared between business-to-consumer (B2C) and business-to-business (B2B) companies. B2C businesses, with the exception of those in the auto components and hospitality sectors, showed a decreased appetite for new debt compared to their B2B counterparts over the past six months.

"Among the over 45,000 MSMEs analysed, the light engineering, electrical equipment, food processing, and chemical sectors emerged as the largest borrowers in the first three quarters of 2024. Interestingly, over the past six months, B2C businesses have taken on less new debt than B2B businesses, except in the auto components and hospitality sectors."

Udyam-Registered MSMEs and the Rise of Short-Term Financing

Examining Udyam-registered MSMEs reveals a fluctuating credit growth pattern. A significant drop from 61% in FY22 to 22% in FY23 was followed by a modest uptick to 23% in FY24. This period saw a notable increase in working capital loans, indicating a growing dependence on short-term financing, perhaps reflecting the prevailing economic uncertainties businesses are facing.

"Loan disbursements have moderated in 2024, but the rise in working capital loans highlights a growing reliance on short-term financing. This shift reflects the challenges businesses face in long-term planning amid economic uncertainty."

Post-Pandemic Recovery and the Role of NBFCs

The MSME sector has displayed impressive resilience in the post-pandemic era. An encouraging 64% of MSMEs have resumed operations, with over half (54%) reporting year-on-year growth exceeding 10%.

Shachindra Nath, Founder & Managing Director of UGRO Capital, observes, "We see moderation in total loan disbursement in recent quarters, a trend reflecting more conservative lending practices across the industry. While this could be attributed to stricter risk assessments, it also presents an opportunity for NBFCs to play a more strategic role in bridging the credit gap."

This moderation in lending, while potentially stemming from stricter risk assessments, may also open doors for non-banking financial companies (NBFCs) to strategically address the credit needs of MSMEs and further fuel their growth.