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Small ticket LAP: <10% penetration implies huge untapped opportunity

  Our recent interaction with financiers suggests most players are actively pursuing small ticket LAP (S-LAP) segment

over medium ticket LAP. As per CRISIL MI&A, the estimated market size for S-LAP stands at INR 22trn, of which lenders

have captured only INR 1.8trn (ticket size of up to INR 1.5mn) as on Mar’23, implying <10% penetration. Currently, SLAP market is concentrated in five states namely Maharashtra (14% of total loans), Tamil Nadu (12%), Gujarat (10%),

Karnataka (9%) and Rajasthan (8%), cumulatively accounting for 53% of total market. Shriram Finance, AU and Equitas

SFB are the leading S-LAP players. In this report, we have focused on <INR 1.5mn ticket size LAP market and analysed

the data for leading 16 financiers having total outstanding AUM of INR 1.5trn as of Mar’23.

S-LAP penetration remains at <10% as on Mar’23; strong growth momentum to continue

Total outstanding loans (secured LAP <INR 1.5mn) for 16 lenders covered in this report stand at ~INR 1trn and, as per CRISIL MI&A, the same stands at INR 1.8trn as on Mar’23, implying <10% penetration. Even including MSME loans of up to INR 3mn, total loans stand at INR 2.5trn as on Mar’23. Secured MSME loans have grown by 24% CAGR from INR 0.5mn-3mn between FY18-23 for NBFCs and 23% CAGR for others. The growth remained the highest at 29.3% CAGR in loans of <INR 0.5mn category

Top-5 states account for ~53% of outstanding loans, implying persistence of state-wise diversity in credit penetration

While overall S-LAP penetration remained low at <10%, our state-wise analysis suggests penetration in top-5 states is >20% and for the rest it is between 1-15%. Penetration in Uttar Pradesh, Odisha, West Bengal, Assam and Bihar (high-growth states) is below 5% and these states cumulatively represent >40% of total addressable market. Telangana, Karnataka, Tamil Nadu, Maharashtra and Gujarat have >20% penetration and account for 25% of the addressable market. Refer Exhibit 5 for player-wise branch distribution in high-growth states.

District-wise analysis suggests that even in highly-penetrated states, top5 districts account for >60% of outstanding portfolio

Our district-wise analysis suggests that even in highly-penetrated states like Maharashtra, Gujarat, Telangana and Karnataka, top-5 districts account for >60% of loans between INR 0.5mn-3mn ticket size. The same implies scope for further penetration even in states having overall penetration of >20%. In high-growth states, top-5 districts account for 45-55% of outstanding loans.

NBFCs command >50% market share in secured MSME loans <INR 3mn 

Our interaction with several financiers suggests given the huge untapped secured MSME lending opportunity and better yields and profitability (Cal. RoA at >3.5%), most financiers are actively pursuing S-LAP over medium / high ticket LAP. S-LAP is predominantly captured by NBFCs as reflected in >50% market share in secured MSME loans below INR 3mn. SFBs are incrementally focusing on scaling S-LAP to leverage branch network and cost of fund advantage over NBFCs. Shriram Finance, AU and Equitas are market leaders in this segment with Aavas, Home First and Equitas having delivered >25% CAGR between FY20-23.

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