micro and small business MSE credit growth falls for second straight month in Maymicro and small business MSE credit growth falls for second straight month in MayThe RBI in its Financial Stability Report earlier this month had asked banks for close monitoring of asset quality of MSME and retail portfolios.

Credit and Finance for MSMEs: Covid unlocks in June post the second wave of the pandemic have led to a sharp bounce back in credit demand by MSMEs that was dampened after a strong Q4 in FY21. According to SIDBI-TransUnion Cibil’s quarterly report on the credit scenario of the MSME sector – MSME Pulse — after the initial drop in commercial credit inquiries by 76 per cent due to the first wave, the volume recovered fast with the government’s ECLGS scheme and have since sustained close to pre-Covid levels. Inquiry volume in March was 32 per cent over the pre-Covid level that was hit due to the second wave.

Moreover, the report indicated that loans worth Rs 9.5 lakh crores in FY21 were disbursed to MSMEs, up from loans worth Rs 6.8 lakh crores disbursed in FY20. “Government interventions like ECLGS under the Atmanirbhar Bharat programme were the major factors in driving this significant surge in credit disbursement to MSMEs,” the report said. The total on-balance sheet commercial lending exposure in India was Rs 74.36 lakh crores in March, up 0.6 per cent year-on-year (YoY) while MSME segment’s credit exposure was Rs 20.21 lakh crores as of March, with a YoY growth rate of 6.6 per cent.

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“I believe the increase in credit demand is likely to meet the working capital needs as during the pandemic most MSMEs didn’t get their receivables either from corporates or public sector. Also, there are fixed expenses to be paid that might be overdue. I don’t think demand would be for expanding the business in the current situation,” Avinash K Dalal, Founder, All India MSME Association told Financial Express Online.

“The MSME credit data speaks volumes of the success of the ECLGS scheme. The scheme has played a major role in 40 per cent YoY growth in disbursements to the sector, thereby reviving the business sentiments among the MSMEs. The key highlight which signals the revival is a credit to new-to-bank (NTB) which has returned back to pre-COVID levels, while credit to existing-to-bank (ETB) remains buoyant,” said Sivasubramanian Ramann, Chairman and Managing Director of SIDBI in a statement.

Credit disbursals to NTB MSMEs had dropped by 90 per cent in April’20 compared to pre-Covid levels but have gradually returned to 5 per cent higher than pre-Covid levels in March’21. On the other hand, the report noted that credit disbursals to ETB MSMEs jumped to 75 per cent over pre-Covid levels in June’20 due to ECLGS, and since then has sustained at pre-Covid levels.

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The NPA rates, the reported showed, for MSMEs were “controlled” at 12.5 per cent for March’21 vis-a-vis 12.6 per cent for March’20 even as the rates for March’21 were higher than 12 per cent in December’20 coupled with credit downgrades.

Importantly, the Reserve Bank of India (RBI) in its Financial Stability Report earlier this month had noted that while PSBs have actively resorted to restructuring under all the schemes, participation by private banks (PVBs) was significant only in the Covid restructuring scheme offered in August 2020. The aggregate restructured portfolio of PSBs stood at Rs 26,190 crore under January 2019 scheme before it dropped to Rs 5,860 crore in February 2020 scheme. However, post-Covid, there was a sharp increase to Rs 24,816 crore during the August 2020 scheme. In contrast, PVBs’ stood at Rs 1,364 in February last year but increased to Rs 11,027 during the August 2020 scheme.

The RBI had also asked banks in its report for close monitoring of asset quality of MSME and retail portfolios. “This calls for banks to shore up capital positions while favourable market conditions prevail. The banking sector will be required to specifically guard against adverse selection bias while being alive to the credit demand from productive and viable sectors.”

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