While the 12-month moratorium on repayments will buy micro, small and medium enterprises (MSMEs) time to ride out the Covid storm, questions remain on the effective increase in credit flows and recoverability of loans from this segment.
While the 12-month moratorium on repayments will buy micro, small and medium enterprises (MSMEs) time to ride out the Covid storm, questions remain on the effective increase in credit flows and recoverability of loans from this segment. Bankers, too, have limited visibility on when MSMEs will be able to actually return to a state where they can service their liabilities.
“The standard non-performing asset (NPA) ratio is always at about 10% within the banking system and that is unlikely to change. How much we can eventually recover from MSMEs will depend on how long Covid stays around and how quickly they are able to get back on track,” said a senior public sector bank executive.
Another banker said that the extended moratorium will simply help small enterprises get their business back to normal. “The good thing is that the measures announced now bring a larger number of MSMEs under the lenders’ ambit because the need for collateral has been dispensed with,” he added.
All the same, the measures do little to change the outlook for the MSME sector. Dipak Gupta, joint managing director, Kotak Mahindra Bank, told analysts on Wednesday that troubles will continue to persist in the segment. “SME will be in trouble per se. It’s been in trouble for a year now and I think that trouble only gets heightened because recovery, even if it’s (lockdown exit) i after one to three months, he has to get the engines running. The SME is the guy who is squeezed the most,” Gupta said in a post-results call with analysts.
There are also concerns on the execution of the government guarantee-backed lending scheme, given that it involves a supply push at a time of subdued demand. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, explained that PSBs will likely have to report in some form the flow of funds to MSMEs and they will thus have a commitment.
“One of the first problems here will be that PSBs don’t have the kind of handle on the MSME sector that they do on corporates because we haven’t had a forced supply-driven banking sector till a few years ago when Jan Dhan was launched,” Parekh said, pointing to some of the problems in the execution of that programme, such as duplicated accounts, which emerged because there were targets to be met and complied with. “There could be problems of execution here too,” he said.
Some enterprises which are in need of funds could continue to remain cut off from bank funding. In a report on Thursday, Anand Rathi Shares and Stock Brokers wrote that an increase in credit line by 20% of the outstanding credit would help MSMEs with no stressed loans. Yet, those with large funding needs, such as enterprises in segments like retail and wholesale trade, transport operators, food processing, non-infra and infra construction may still face funding challenges.
Further, the remit of the scheme extends only to firms with existing bank loans. “Only one in ten MSMEs get access to bank funding. Therefore, the vast majority of MSMEs would not benefit from the schemes apart from possible equity support to viable and growth MSMEs,” the report said.