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Credit flow to micro and small industries segment has contracted in the nine months ended December 2018, indicating that the segment is facing a credit crunch and banks are reluctant to advance loans to these small units at a time when other industry segments have started witnessing a recovery in credit growth.
Data from the Reserve Bank of India shows that loan outstandings of micro and small units have fallen by 2.14 per cent to Rs 365,000 crore as on December 21, 2018 from Rs 373,000 crore in March 2018, a decline of Rs 8,000 crore. Credit flow to micro and small units had declined to Rs 360,500 crore in May 2017, six months after the withdrawal of Rs 500 and Rs 1000 bank notes which led to closure of thousands of small units across the country.
According to the RBI definition, in a micro enterprise, investment in plant and machinery should not exceed Rs 25 lakh and in a small enterprise, investment in plant and machinery should be more than Rs 25 lakh but below Rs 5 crore. Credit flow to micro and small units was a subject of conflict between the RBI under Urjit Patel and the government which pushed for more steps to improve credit flow to the small sector. The RBI then decided to set up an expert committee under former Sebi chairman U K Sinha to suggest long-term solutions for the economic and financial sustainability of the MSME sector.
Credit growth to micro and small units has failed to pick up despite assurances from the RBI that credit will be made available to the productive sectors of the economy. “After demonetization and the NBFC liquidity crunch, fund flow to small units has been impacted,” said a senitor official of a bank.
On the other hand, year-on-year non-food credit has showed a growth of 12.8 per cent as of December 21, 2018 and 14.5 per cent as on February 1, 2019. While micro and small units languished due to fund crunch, RBI data shows large industry segment showed a credit growth of 5.1 per cent (Rs 22,79,800 crore) and medium industries 9.2 per cent (Rs 104,600 crore) on a year-on-year basis.
Banks showed more interest in lending to the services sector and also the personal loan segment which showed a growth of 23.2 per cent and 17 per cent respectively. Within the personal loan segment, credit card outstandings shot up by 31.7 per cent to Rs 81,500 crore as of December 21, 2018.
In its report on credit deployment released last week, the RBI said credit flow to micro and small industries continues to be negligible, with growth still in the contraction zone.
“Several policy efforts, viz., speeding up of loan processing by banks, placing of adequate collateral system and loan guarantees can further enhance credit to micro, small and medium enterprises,” the central bank said.
The RBI in its Fiscal Stability Report, released on December 31, 2018, highlighted continuing stress in the MSME sector where the non-performing assets (NPAs) for the micro segment (exposure less than Rs one crore) increased to 8.7 per cent in June 2018 from 7.9 per cent in March 2016 and that for the SME segment (exposure of Rs 1 crore to Rs 25 crore) increased to 11.5 per cent from 9.8 per cent.
The report also points out that from a lender segment perspective, while non-banking financial companies and private banks have seen a marginal decline in NPAs from the segment over March 2017 to June 2018, PSBs have seen an increase to 15.2 per cent from 14.3 per cent.
Further, the central bank in its announcement on January 1, 2019 had come out with a one-time restructuring scheme for loans given to MSMEs with an aggregate exposure (both fund and non-fund based) not exceeding Rs 25 crore. There will be no downgrade in the classification of loans under the scheme. While the borrower account could be overdue, it should still be classified as standard as on 1 January 2019 and should continue to be classified as standard till the date of restructuring.
According to India Ratings, operations of MSMEs with inherent weakness in operations beyond the ambit of temporary mismatches related to demonetisation and GST could still play out and manifest post the dispensation period is over.
“This dispensation may encourage some of the MSME borrowers, which are otherwise operating satisfactorily, to opt for the scheme and impair the credit discipline,” it said. An analysis of public sector banks exposure to all loans less than Rs 5 crore reflects an increase in special mention accounts (SMAs) pool in FY18 over FY17.
