Money & Banking

Small, medium sectors face credit crunch

Beena Parmar Mumbai | Updated on January 22, 2018 Published on December 08, 2015

Rough patch A high risk and unsecured sector, SME remains the black sheep of the lending institutions

Spooked by bad loans of large corporates, banks reduce lending to small units

Banks have squeezed their lending to micro, small and medium sector enterprises (MSMEs) as the spillover from the bad loans of large corporates continue to haunt their balance sheets.

According to the monthly sectoral loan deployment data by the Reserve Bank of India, outstanding credit to medium-sized industrial companies stood reduced at ₹1.13 lakh crore as on October 30 from ₹1.24 lakh crore in October last year, a de-growth of 9 per cent.

Since the start of the financial year, the lending has reduced to a negative 10.9 per cent from ₹1.26 lakh crore as on March 2015.

Additionally, lending to micro and small sector also slowed down at 4.9 per cent year-on-year to ₹3.70 lakh crore as of October-end 2015, against 16.5 per cent growth at ₹3.52 lakh crore as of October-end 2014. Since March, the growth was negative at -2.6 per cent (₹3.80 lakh crore as of March-end 2015).

Loans to the MSME sector make up about 20 per cent of the overall credit given out to industry. A high risk and unsecured sector, SME remains the black sheep of the lending institutions.

In a recent reply in the Lok Sabha, a Minister said, “As per provisional data compiled by the Reserve Bank of India, the number of sick MSMEs in March, 2015, was 537,286, with Uttar Pradesh, Gujarat and Maharashtra having the highest number.”

Vibha Batra, Senior VP - Group Head Financial Sector Ratings, ICRA, said: “ Commodity prices have softened; so a lot of lending would be in the form of working capital. There has been a slowdown in the larger industry; so smaller firms cannot be disconnected from that.”

According to a general manager of a public sector bank, “Most MSMEs are dependent on larger units and there is no demand for credit. As such, lending to the sector is not a concern and NPAs have been under control. However, overall demand is yet to pick up from large corporates and this will gradually trickle down to the MSMEs. Our NPAs in the sector have been around 2-3 per cent.”

According to a government report published in February 2015, credit from the scheduled commercial banks (the largest constituent of the existing financial architecture) to MSMEs has grown at a compounded annual rate of 23 per cent between 2012 and 2014, compared with the annualised growth in overall non-food credit of 14.1 per cent during the same period. However, there is a feeling in the industry that access to credit from the financial sector for MSMEs remains a challenge.

Big challenge

Key factors attributed as reasons for the challenge are that MSMEs are largely non-corporate entities with no formal legal structure, high risk perception with vulnerability to economic trends and risk of elongation of working capital cycles, unreliable traditional methods of credit appraisal due to unavailability of adequate financial statements, account books and history of tax returns, among others.

Kunaey Garg, Analyst – Financial Institutions, India Ratings, said: “We do see the SME portion constituting a significant portion for many banks. For SBI, it is 13 per cent of the total loan book, while for Bank of Baroda it stands at about 20 per cent as of September 2015.”

For Bank of Baroda, net NPAs for the sector stood at 4.3 per cent in March which jumped to 6.25 per cent in June. However, it declined to 5.7 per cent in the second quarter.

In its post results conference call, Bank of Baroda said it would see more stress in the manufacturing sector and its SME portfolio is concentrated in manufacturing, which is why it saw stress in the sector. So in Q4, most banks could focus on services in the MSME sector to diversify their portfolios and see better quality book.

“If you compare loan growth between March and now, most public sector banks have seen de-growth in their overall loan books. However, by the fourth quarter it could grow. Generally, there is a push towards the year-end and so MSME loans may see some growth in the last quarter of the financial year,” Garg added.

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Published on December 08, 2015
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