Small business loans carry as many risks as large business loans, depending on the level of non-performing assets (NPAs). However, despite this, banks have not reduced their credit to small and medium-sized businesses. Micro, small and medium-sized enterprises (MSMEs) defaulted to a peak of 13.08 percent for public sector banks at the end of March 2018, compared with 12.56 percent in March 2017, according to data provided by the Reserve Bank of India (RBI).
However, outstanding loans to medium-sized industries rose 3.3 percent year-on-year to Rs. 1.05 billion, according to data released by the RBI on October 31.
Again, the credit for micro and small industries, at Rs 3.64 million on September 28, 2018, was about the same level as the previous year.
The deterioration of the credit quality of MSMEs was even more severe in the banks as part of the rapid corrective measures (PCA). For these lenders, NPAs from the MSME portfolio rose to 15.74% at the end of March 2018, about 150 basis points above the level of a year earlier, according to documents reviewed by FE.
The government fears that the flow of credit to the MSME sector will be limited by 11 state-owned lenders operating under the PCA (Rapid Corrective Action). This has become a contentious issue between the Center and the RBI and is expected to be discussed at the next meeting of the RBI's board of directors on November 19th.
For its part, the RBI had eased earlier in the year the standards for the recognition of non-performing assets in the MSME segment.
On June 6, the central bank extended to all MSMEs the benefit of the classification of APNs based on arrears of payment for 180 days. Previously, banks and non-bank financial corporations (NBFCs) were allowed to classify MSME exposures in NPAs 180 days after the due date only if the companies were GST compliant. This benefit for non-GST compliant businesses will only be available until December 31, 2018.
In recent quarters, some banks have admitted that they are under stress on their SME portfolio. During the June 19 quarter, Kotak Mahindra Bank recorded an increase in provisions for its small business loan portfolio.
Manish Kothari, head of the bank – Large companies and SMEs – of the bank, told FE: "We saw an impact for us on the traders segment and the valuation of collateral becoming a problem at the time of liquidation. Traders who sold somewhat volatile products, such as commodities, contributed to some stress. Similarly, companies that dealt with customers who were selling in advance in cash were affected by the demonetization. "
Last Friday, Prime Minister Narendra Modi announced a program for MSMEs. These include an online loan portal where loans of less than 1 crore must be granted in less than one hour, an additional 2% interest subsidy for MSMEs registered in the commodity tax. and GST and more trade receivables on an electronic delivery platform to ensure greater credit availability.
The share of arrears in MSME portfolios of private banks increased from 2.38% a year earlier to 2.61% at the end of March 2018. For foreign banks, the share of outstanding MSME accounts is in fact down to 3.3% at the end of fiscal year 18, compared with 3.32% at the end of fiscal year 2017.