Among the sectors worst affected by demonetisation, the Micro, Small and Medium Enterprises or MSME sector, which had started showing signs of recovery over the past two years, are now staring at another body blow as the liquidity squeeze faced by Non Banking Financial Companies (NBFCs) chokes a key source to funding to units in the sector. The MSMEs, which accounts for about 45 per cent of manufacturing output and nearly 40 per cent of the total exports, are also experiencing difficulties in increasing exports.
The Reserve Bank of India data on deployment of gross bank credit till August-end this year shows that credit to industry has grown by just 1.9 per cent year-on-year, and, within this broad category, credit to micro and small enterprises has increased 2.6 per cent, and to medium enterprises by 6.5 per cent. In contrast, credit to the services sector has posted a phenomenal 26.7 per cent growth, while overall non-food credit has grown at 12.4 per cent. The MSME segment accounts for just about 6 per cent of the gross bank credit. With banks being unable to meet entire credit demands of the sector, the MSMEs had increasingly relied upon the NBFCs, whose share of credit to the sector in total credit doubled to 10 per cent in last five years.
The RBI data shows that loans by NBFCs to MSMEs grew at an annual average rate of 35 per cent during the last five years. However, the current liquidity squeeze that the NBFCs are going through, has reduced the credit flow to the MSME sector.
Facing nearly Rs 2.5 lakh crore worth of redemption of their debt papers, NBFCs have shifted focus from growing the loan book to meeting their obligations, choking a key source of funding to the sector. “Small and medium businesses that are the cornerstone of India’s economy are yet to recover from the demonetisation shock. This has had a negative impact on employment as the economy continues to struggle to create enough new jobs for our youth,” Former Prime Minister Manmohan Singh said Thursday.
Aware of the challenges faced by the MSMEs, the government last week announced several measures to boost fund flow for them, including providing GST-registered MSMEs access to cheaper loans, mandating state-owned companies to procure at least 25 per cent of their product requirements from smaller firms and a lighter touch in the implementation of labour laws. The government announced two per cent interest subsidy on fresh loans and online sanction of loan up to Rs 1 crore within 59 minutes for the sector. An allocation of Rs 6,000 crore for setting up of 20 technology hubs and 100 centres as spokes to galvanise advancement of technology in the sector was also announced.
A recent paper by researchers at the RBI, which analyzed credit dynamics and export performance of MSMEs, noted that while demonetization hit credit flow to MSMEs, the goods and services tax (GST) reduced their exports. “Demonetisation led to a further decline in the already decelerating credit growth of the MSME sector, while GST implementation does not seem to have had a significant impact on overall credit to MSMEs. The growth in credit to MSMEs has recovered since the lows of late 2017 to reach the mid-2015 level…In contrast to credit growth, MSME exports appear to be affected more by GST implementation vis-à-vis demonetization,” the report said.
MSME exports showed only mild weakness post October 2016 (demonetization period), but decelerated sharply during April and August 2017 (GST implementation period) with only a temporary recovery during the post-GST implementation period, it said.