Small enterprise financing in India has traditionally been restricted to banks – primarily public sector banks. A large proportion of the small enterprises continue to lack access to institutional credit. Of the 2.6 crore enterprises in India, approximately 5% have access to formal finance. The total demand for finance is estimated to be INR 32, 50,000 crore with 80% of the demand originating from the informal sector. The share of formal finance to the sector is INR 7, 00,000 crore. A further analysis reveals that the total institutional credit to enterprises having capital investment up to Rs 25 lakh is approximately INR 2, 30,000 crore as per the SIDBI report in 2012 and IFC report in 2012. About 90% of the institutional credit has come from scheduled commercial banks with other players being regional rural banks and urban cooperative banks. An estimated 67% of enterprises remain untouched by the formal financial sector.
While banks have been active in the SME space for larger enterprises, microfinance institutions (MFIs) and the Self-Help Group-Bank Linkage Programme (SHG-Bank Linkage) have been successful in meeting the credit needs for household-based income-generating activities and very small enterprises (commonly, provision stores or tea stalls). Therefore, there is clearly a significant “missing middle” segment that has been largely left out by the mainstream credit delivery channels. This segment consists primarily of relatively unorganized sole proprietorship or partnership firms, known as Own Account/Micro Enterprises, thus giving rise to the requirement of enterprise-based lending.
IFMR Capital Partners in Small Business Loans
IFMR Capital’s partners in this space have demonstrated their financial ingenuity by developing a very innovative and specialised model of lending to small business and enterprises. The origination model relies on an in-depth understanding of the customer segment in the target geographies. Across all the partners, the origination model thrives on independent and separate business and credit functions. All partners have customised their processes to effectively assess the enterprise for credit delivery.
Each partner has developed templates for margins and cash flow analysis of the businesses that are financed. Wherever there are no documentary proofs, there is focus on understanding and verifying the underlying cash flows of the business through proxy information and multiple checks.
Portfolio quality of these partners has continuously been exceptional/superior in comparison to the industry standards. Gross NPA of all IFMR Capital partners in this space has been in the range of 0-2% against an average of approximately >3.5% as of March, 2015. The robust origination, collection and delinquency management processes have resulted in steep reduction from PAR>0 to PAR>90 to PAR> 180.
The cumulative Asset Under Management (AUM) of SBL partners of IFMR Capital has doubled over the last one and half years from approximately INR 2000 crore to INR 4000 crore. All NBFCs in the market of lending to MSMEs are currently very small in terms of the small business loan portfolio that they manage. The aggregate AUM of all these entities is estimated at INR 10,000 crores, with individual AUM under INR 1000 crore (with the exception of MAS Financial and Intec Capital).
The asset class has witnessed significant equity interest from a variety of investors: early stage investors such as Elevar and Lok, development financial institutions such as FMO, Proparco, Lok Capital, DEG and SIDBI, as well as mainstream private equity players such as Matrix Partners, Westbridge, Warburg Pincus, Aspada, SAIF Partners, Khosla Impact, MSDF, Omidyar, Sequoia, Chrys Capital and fund advised by MOPE. Given the nascent stage and vast demand, IFMR Capital expects significant growth from existing players, as well as the emergence of newer players. In the last two years, the SBL partners of IFMR Capital have seen more than INR 500 crore of equity infusion from institutional investors.