Mumbai: The implementation of goods and services tax (GST) and continued impact of demonetisation in some segments are likely to be high asset quality risks for small and medium enterprise (SME) lenders, said Ambit Capital Pvt. Ltd.
According to the brokerage firm, many micro, small and medium enterprises (MSMEs) and SME customers are grossly under-prepared for the severe disruption that GST can trigger in the short term.
“Already these businesses are disposing of their inventories and have practically stopped further purchases. Continued uncertainty could see informal players losing out to the better prepared large formal players. Even on an ongoing basis, many in the informal segment could come under pressure and face margin pressure," it said in a 20 June report.
It added that wide availability of centralized data, GST and better tax compliance will improve lenders’ ability to assess customers’ creditworthiness and lower the entry barriers in the segment, which in turn could lower net interest margins (NIMs).
However, Ambit also believes that there is large untapped opportunity in small-ticket business and SME loans.
It said that while most banks are active in SME financing, non-banking finance companies (NBFCs) are still strongly positioned in the sub-segments where collateral quality is not very high, the borrower has high unaccounted income and ticket sizes are low.
According to the brokerage firm, SME lending has healthy return on equity (RoE) business, given higher yields and benign asset quality due to better ability to realize collateral for small loans versus large loans.