BCG’s Annual FIBAC Productivity Report reveals MSME Lending is leading growth in banking space at 22%

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Mumbai: The Boston Consulting Group (BCG), one of the world’s leading management consulting firms, today unveiled the Annual FIBAC Productivity Report on Indian Banking Industry – 2018. The theme of the report is – Providing Financial Services to SMEs in an Increasingly Digital Ecosystem. With the advent of fin-tech companies, e-commerce, big-data, and cloud, digital is transforming millions of lives. In given scheme of things, BCG’s report reflects where the Indian industry stands in the milieu. It catalogues on how in digital matrix, banks have performed in recent past.

Saurabh Tripathi, Senior Partner & Director, APAC Regional Practice Leader – Financial Institutions, BCG said, “It is a privilege to be associated with FIBAC for eight years; and this year has been very interesting for us. With its own share of challenges to tackle on NPAs or the agility in adopting emerging technology to enhance access and create a digital banking ecosystem, the banking industry is overhauling for good. Moreover, digital enabler models boosting MSME lending and alternate credit scoring models have revolutionized the lending space in India.”

Yashraj Erande – Partner & Director, BCG said, “MSME lending can be the largest source of value creation for the financial services industry as well as India as a nation. It’s both an obligation and an opportunity whose time has come. It will have a multiplier effect on the country’s GDP.”

Rashesh Shah – President, FICCI; Chairman and Chief Executive Officer, Edelweiss Group said, “Timely availability of credit has been the biggest issue for MSMEs. For long credit was not democratised but over the last 10 years there has been an evolution of information bureaus and an important role played by rating agencies. With massive digital footprints being created we are looking at a dramatically changed scenario now. Technology will play a big role in the rapid evolution of the credit ecosystem over the next 5-10 years and is expected to transform the Indian economy.”

The report reveals that banking revenue pool is growing at 8% which is driven by strong fee income growth of 14%. On deposit front, in overall banking industry, there will be slowdown in growth in FY18. Savings account balances will continue to outgrow current account balances.

VG Kannan, Chief Executive Office, Indian Banks’ Association said, “At IBA, we are committed to promote responsible credit and I believe there is need to establish a robust framework that help lenders and consumers to utilize the access to finance responsibly. The BCG report reveals various progresses that industry has made like digital adoption, MSME finance opportunity, which gives necessary clarity on steps that need to be taken to ensure financial accountability and yet maximize opportunity for industry growth.”

After recording 17% growth, post demonetization, growth in balances slowed down to 7%. This is result of muted growth in all segments – Individual, Corporate and MSME.

PSUs, New Private and Old Private banks are showing different business models. With focus on masses, large PSU banks have the largest number of savings accounts driven by the larger branch network; new private banks have been largely successful in capturing high-value savings accounts, on the other hand, old private banks are neither showing focus on premium segments nor on masses.

BCG’s report has identified that auto loans are witnessing strong revival post demonetisation. In FY17, due to demonetization, financing of auto loans had seen a slowdown. This had resulted in a pent-up demand in FY18. Gradual return of the liquidity situation to normalcy has led to a release of a pent-up demand and a robust 24% growth in auto loans in FY18.

Trends in MSME Lending

Advances to SMEs growing at 22% for private – new banks in line with NBFCs leading the growth in this space
Within MSMEs, Private – New banks’ lending primarily to small enterprises
Advances to small enterprises witnessing highest growth among sub-segments
States with lower MSME credit penetration show higher growth in MSME credit
Robust growth in fee income seen, other income lags due to trading losses
Banks leveraging growth in mutual funds to boost fee income
Assets under management contributed by retail segment grew at a CAGR of 32% from FY14 to FY18
Imperatives for banks

Managing NPAs and Stressed Assets
NPA situation continues to worsen; however, high variability seen in asset quality of MSMEs and corporates
In MSME advances, loans to medium-sized enterprises have highest gross NPA of 16%
Retail advances with lowest slippages (2%) and highest upgradations (21%) in FY18
Banks with highest centralized credit and risk staff having lowest NPAs
For this report, with representative sample size of more than 2600 respondents, BCG factored 34 banks across four segments – 15 medium PSU banks; six large PSU banks and five new private banks.

 

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