In the context of increasing concerns over bad loans, banks are now playing it safe when extending loans to small businesses, a segment that throws up both opportunities and risks for banks.
An analysis of data shows that the stress on loans extended to MSMEs (micro, small and medium enterprises) is on the rise.
On an average, the increase in non-performing assets (NPAs) from this segment for most banks is about two percentage points.
Compared to 2-2.5 per cent of total MSME loans, the bad loans have gone up to 3.5-4.5 per cent over the last three to four quarters.
The reasons for this are varied. According to CVR Rajendran, Chairman and Managing Director of Andhra Bank, the adverse impact of general economic slowdown and dip in manufacturing sector growth are bound to push the smaller entities into difficulties as order flow and payments decrease. Prolonged power crisis in States such as Andhra Pradesh and Tamil Nadu have also made matters difficult for them.
Besides, while SME customers require credit for around 90 days, suppliers provide credit only for 30 days, according to APK Reddy, President of the Federation of Small and Medium Enterprises of Andhra Pradesh.
“All over the country, the situation is the same. Going by the NPA norms, any loan will turn bad if there is no repayment for 90 days. But this window is insufficient for many smaller units. The Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act is also being applied ruthlessly by banks in cases of default,” he claimed.
According to P Naveen, who owns a rolling shutter unit at the industrial cluster at Jeedimetla here, one of the reasons for small units turning bad customers for banks is the blanket application of mid-corporate lending norms for these units too.
“Given the current economic scenario, I feel MSMEs should be treated on a separate footing by the RBI and other banks,” Naveen said. He had restructured his loan account with a public sector banks just three months ago.
Lending continues There is a silver lining, though. Despite the increase in bad loans, MSMEs are still seen as an opportunity by some banks, says Rajendran. In fact, some banks are also stepping up lending to this segment. State Bank of Hyderabad, for instance, has declared this as an MSME year, while Andhra Bank has just launched ‘Abhivruddhi’, a new scheme for the segment. Corporation Bank’s loans to MSMEs in the third quarter have risen 32 per cent, at ₹21,995 crore over the year-ago period.
A senior SBI official said while his bank is cautious about lending to small units with exposure to power and infrastructure, there would be no stoppage of lending to the segment, especially as credit demand from the corporate sector is almost nil.
“Banks are increasingly focussing on retail, agriculture and MSME sectors for credit growth,” he added.
As on December 31, 2013, SBI’s advances to SMEs were lower at ₹1.64-lakh crore, compared with ₹1.84-lakh crore in March 2013.
Clearly, MSMEs could expect mixed trends in loan availability going forward.