Unavoidable option

The evergreening of large corporate loans is at the root of Indian banks’ bad loan crisis and the issue of regulatory forbearance on MSME loans was one of the key bones of contention in the RBI-government standoff. In this backdrop, it is not surprising that the RBI’s decision to grant banks additional leeway to restructure their MSME loans, should attract trenchant criticism. Fears that this move will undermine India’s credit culture, already weakened by corporate loan write-offs and farm loan waivers, are understandable. But then, multiple events beyond their control have dealt a body blow to MSME finances in the last couple of years. Fire-fighting measures have now become inevitable to prevent their liquidity crisis from snowballing.

It is wrong to compare RBI’s latest concession for MSMEs with banks’ wholesale restructuring of large corporate loans, on many counts. One, India Inc’s large defaulters were funded by public money, with promoters having little skin in the game. But the majority of MSMEs are owner-funded with promoters’ fortunes closely intertwined with the business. Two, despite chipping in with 30 per cent of India’s GDP, MSMEs get less than their fair share of bank credit, garnering just 14 per cent of the credit pie. Three, while many large corporate defaulters have landed at the NCLT due to over-ambitious projects and wilful funds diversion, MSMEs are mostly victims of usurious interest rates and inordinate payment delays by clients. An RBI research paper in August 2018 noted the genesis of this crisis lay in banks sharply pruning MSME loans in the two years prior to demonetisation. By the time they resumed lending in late 2017, MSMEs had to contend with the demand shock from the note ban and botched implementation of GST. This is also why RBI’s attempts to transition MSMEs from a 180-day bad loan recognition norm to the 90-day rule had to be deferred. Even RBI’s latest leeway to lenders to restructure MSME loans is one-off and has several conditions attached. This dispensation is only for GST-registered borrowers with loans of up to ₹25 crore, currently treated as standard. Estimates peg the value of MSME loans that could meet these criteria at ₹10,000-12,000 crore, posing no big risk to bank balance sheets.

But having made this concession, the RBI, banks and the government must now try and ensure that these MSMEs get back on their feet, without turning NPAs. Given that regional private banks and NBFCs have a far better credit record with MSMEs than public sector banks, they must collaborate on new MSME loans. The Trade Receivables Discounting System (TReDS) is an important platform to grant MSMEs access to low-cost finance and more firms must be nudged to onboard it. Finally, the lack of reliable data on the financial performance and operating characteristics of the MSME sector has been the biggest impediment to diagnosing and resolving the current crisis, and this needs to be addressed on a war footing.

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