SME Financing

How Budget 2018 Marks an Increase in Effort Towards SME Financing

February 9, 2018

Small and Medium Enterprises (SME) are often said to be the backbone of developing economies like India, since they contribute so many jobs. However, while their importance is recognized in India, policy and financing constraints continue to inhibit the growth of this sector.

For example, in spite of the Pradhan Mantri Mudra Yojana (PMMY) launched in Budget 2016 making a huge difference in the sector over the past two years, the credit to the SME sector continued to shrink. In FY 2017, loans worth Rs. 1.75 trillion were disbursed under PMMY, with the target for the year being Rs. 1.8 trillion. That is to say 97% of the target was met.

However, credit losses continued to exist and even grow. This pointed to a need for the government to focus more on increasing the availability of finance to SMEs.

Let’s take a look at the policy changes the Union Budget of 2018 has brought in to address this issue.

Redefined Policy for NBFC Refinancing

NBFCs have contributed a major share in the financing of SMEs, with their contribution rising from 8% five years ago to 18% in fiscal 2017. Taking this into consideration the Budget of 2018 has announced a redefining of policy and eligibility criteria set by MUDRA for the better refinancing of NBFCs. Since NBFCs specialize in catering to credit for sectors like retail, consumer and vehicle loans, micro small and medium enterprises (MSME) and microfinance among others, this move can really give our economy a boost.

Importance to FinTech Companies

In addition to NBFCs, technology-led lending platforms have also contributed greatly to the growth of credit for SME financing. In fact, the digital lending industry has already made credit possible for over 30,000 MSMEs and with the right policy support the number of MSMEs helped, could increase to over a million over the next three years. Recognizing this, a group has been created in the Ministry of Finance to examine the policy and institutional development measures needed for FinTech companies to grow.

Change in Corporate Taxation Rules

Corporate taxation has also undergone a few policy changes in favour of SMEs and MSMEs. The new provision states that companies with a turnover of less than Rs. 250 crore in FY17 will be required to pay only 25% in FY19, as opposed to the earlier rate of 30%. This difference in tax rate (which will come to about 9%) is expected to improve their profit after tax margins, leading to better earnings visibility.

Thus, with these measures, the government is looking to address the bad loans and stressed accounts of MSMEs. Additionally, over fiscals 2018 and 2019, the SME lending market is expected to grow at 11% CAGR, with NBFCs outperforming banks.

NBFCs are likely to have more of a focus on small-ticket loans, adoption of technology and data analytics, and an increased focus on small towns and cities. Lastly, through providing input tax credit, more efficient logistics and capturing market share from unorganized players, GST will also likely positively affect the organized MSME sector.

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