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MSMEs: Loan losses high in sector, but banks continue to lend

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On its part, the RBI had earlier this year eased norms for recognition of non-performing assets (NPAs) in the MSME segment.

Lending to smaller businesses is as fraught with risks as is lending to large companies, going by the level of non-performing assets (NPAs). However, despite this banks have not pulled back on credit to mid-sized and smaller companies. Delinquencies on account of micro, small and medium enterprises (MSME) rose to a high 13.08% for public sector banks (PSBs) at the end of March 2018, compared with 12.56% in March 2017, according to data sourced from the Reserve Bank of India (RBI).

However, outstanding loans to medium industries rose 3.3% year-on-year to Rs 1.05 lakh crore, data released by the RBI on October 31 reveals.

Again, credit to the micro and small industries, at Rs 3.64 lakh crore as on September 28, 2018, was more or less at same levels in the previous year.

The worsening in the quality of MSME credit was even more severe at banks under the prompt corrective action (PCA) framework. For these lenders, NPAs arising from the MSME portfolio stood at 15.74% at the end of March 2018, about a150 basis points higher than the level a year before that, documents reviewed by FE showed.

The government has been concerned that the flow of credit to the MSME sector is being restricted because 11 state-owned lenders are operating under the PCA (prompt corrective action) framework. This has become a contentious issue between the Centre and the RBI and is expected to be discussed at the next RBI board meeting on November 19.

On its part, the RBI had earlier this year eased norms for recognition of non-performing assets (NPAs) in the MSME segment.

On June 6, the central bank had extended the benefit of 180-days past due (dpd)-based classification of NPAs to all MSMEs. Earlier, banks and non-banking financial companies (NBFCs) were allowed to classify MSME exposures as NPA 180 days after the due date only if the firms were GST-compliant. This benefit for non-GST-compliant enterprises will be available only up to December 31, 2018.

In recent quarters, some banks have admitted that they are facing stress in their SME portfolio. In the June quarter of FY19, Kotak Mahindra Bank saw an increase in provisions against its portfolio of loans to small enterprises.

Manish Kothari, business head – corporate banking and SME – at the bank, had told FE, “We saw an impact for us in the trader segment and also in the valuation of collaterals becoming an issue at the time of liquidation. Traders who were dealing in products that were a little volatile, for example, commodities, have contributed to some stress. Similarly, businesses that dealt with customers who were subsequently selling ahead in cash were impacted by demonetisation.”

Last Friday, Prime Minister Narendra Modi announced a package for MSMEs. These include an online loan portal where loans up to `1 crore are to be granted in less than an hour, an extra 2% interest subvention for goods and services tax (GST)-registered MSMEs and more trade receivables on an e-discounting platform so as to ensure greater credit availability.

The share of delinquencies in private banks’ MSME portfolios rose to 2.61% at the end of March 2018 from 2.38% a year ago. For foreign banks, the share of delinquent MSME accounts actually fell to 2.5% at the end of FY18 from 3.32% at the end of FY17.

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