Rising rates may pose risk to MSME loan portfolio | The Financial Express

Clipped from: https://www.financialexpress.com/industry/sme/rising-rates-may-pose-risk-to-msme-loan-portfolio/2920015/

These comments come when a recent report from CRISIL Ratings indicated that around 43% of MSMEs would be unable to return to their pre-Covid-19 margins in 2022-23(April-March) due to high inflation, high interest rate, and depreciating rupee.

Rising rates may pose risk to MSME loan portfolioThe MSME sector’s total loan demand is pegged at Rs 69.3 trillion, with less than 15% of the demand being catered to by the formal lending segment, a recent press release by venture capital firm BLinC Invest showed.

A rising interest rate may pose a risk to the micro, small and medium-sized enterprises (MSME) portfolio of lenders considering that a floating interest rate is applicable to these borrowers, say analysts.

“A lot of MSMEs are operating in the export market. So, if there is a slowdown in the global economy, these entities could see an elongation of working capitals or a decline in their revenues,” said Anil Gupta, Senior Vice President & Co-Group Head, ICRA.

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“Rising interest rate would have a larger impact on MSMEs because unlike in the case of most retail loans, MSME loans are linked to a floating interest rate,” he added.

These comments come when a recent report from CRISIL Ratings indicated that around 43% of MSMEs would be unable to return to their pre-Covid-19 margins in 2022-23(April-March) due to high inflation, high interest rate, and depreciating rupee.

“MSMEs typically sit at the lower end of bargaining power and for them, passing on higher costs emerging due to higher interest rates is always behind the curve,” said Siddharth Mahanot, co-founder, Indifi Technologies.

In fact, bank loans to micro and small enterprises rose 20.4% year-on-year in September. Loans to medium enterprises rose 31% year-on-year.

The MSME sector’s total loan demand is pegged at Rs 69.3 trillion, with less than 15% of the demand being catered to by the formal lending segment, a recent press release by venture capital firm BLinC Invest showed.

Nevertheless, more private banks and non-bank lenders are likely to consider lending to the default-prone MSME sector going ahead, the press release said.

All in all, bankers remain confident that the stress in their MSME portfolio will be limited as they banks have not completely passed on Reserve Bank of India’s (RBI) repo rate hikes on to their borrowers.

“Since June, the repo rate has gone up by 2.25%, but the effective interest rate hike to an MSME is only 1-1.25%. So, the hike interest rate has not come as a sudden shock to customers,” said Shyam Mani, head-non-resident Indian and small, and medium-sized banking, CSB Bank.

Also Read: SME Artha 2022 | Video: Slippages in MSME sector steadily improving, says BCG’s Neha Gupta

“So, as of now, we are not seeing any risk as far as the portfolio is concerned. We are not seeing any trend of customers moving into special mention accounts as of now,“ he added.

Nevertheless, analysts remain cautious on the impact of the rising interest rates and broader macro-economic environment on asset quality on lenders. “The last few rounds of interest rate increases have been absorbed without any significant impact on MSMEs cashflow. But further rate increases in future can cause stress resulting in more pre-closures and balance transfers,” Anuj Pandey – chief risk officer, U GRO Capital said.

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