Demonetisation hasn’t been easy on anyone but it might prove to be most damaging for small and medium enterprises, many of whom transact mostly in cash.
Data is tough to come by but anecdotal reports and assessments made by analysts suggest that SMEs may be the hardest hit due to their reliance on cash and their limited staying power. For them, a loss of business even for a few months could prove to be debilitating.
This, in turn, could add to the bad loan woes of Indian banks which, over the last few years, have seen non-performing assets surge. While the focus so far has been on stress emerging from large over-leveraged companies, the demonetisation could lead to an incremental build up of bad loans from the SME segment.
In a conversation with BloombergQuint, Arundhati Bhattacharya, chairman of State Bank of India acknowledged that SMEs accounts could start to turn bad if the business doesn’t normalize over the next couple of months.
I am still being optimistic and saying that if we can get back into normal mode within the next one month or so, the impact will be temporary. But, having said that, I think that the SME sector will need some hand holding because they don’t really have any staying power, they don’t have deep pockets. They make a day-to-day living and their margins are compressed in any case.Arundhati Bhattacharya, Chairman, State Bank of India
SMEs May Face The Brunt Of An Economic Slowdown
The economic impact of the government’s November 8 decision to demonetise remains uncertain. The Reserve Bank of India expects the impact to be transitory, it said as part of its most recent monetary policy review on December 7. Estimates from economists vary but many expect the growth rate to slip for at least the next couple of quarters. For the September ended quarter, the Indian economy grew 7.3 percent.
While the broader economy may recover, the SME sector may find it tougher. In a report published on December 5, Ambit Capital Research put out a survey of 82 SMEs. The survey showed:
- 32.9 percent of SME respondents conduct more than half their business in cash
- 55.1 percent said that it will take between 2-6 months for business to normalise
- 58.8 percent said that they expect competition from the formal sector to pick-up
- NPAs in the SME segment may rise as collections from customers may drop
A Call For Regulatory Forbearance
Bhattacharya said that the government, the regulator and banks can all do their bit to help SMEs tide over the period of pain.
On November 21, the RBI said that scheduled commercial banks, state cooperative banks, district central cooperative banks, non-banking financial companies and microfinance companies will get an additional 60-day window for classifying stressed standard accounts as non-performing assets, if the payments are due between November 1 and December 31.
Bhattacharya suggests that the central bank give banks the flexibility to extend the tenure of SME loans without classifying those loans as restructured.
For SBI, gross NPAs in the SME segment stood at Rs 17,743 crore or 9.20 percent of the total loans given to that segment, shows an analyst presentation made by the bank following its September quarter earnings. Overall, gross NPAs for the bank were at 7.41 percent as of September 30, 2016.
We have made quite a few suggestions. In the SME space, for instance, whatever was due this period, we can simply back-end that. Whatever could not be paid during the 60-day period, it could be back-ended. So if they are required to pay it back in 2.5 years, we can give them another 3 months without making this a restructured loan.Arundhati Bhattacharya, Chairman, State Bank of India
Bhattachrya adds that SBI is asking its large industrial clients to bring together their suppliers and encourage them to move towards digital transactions. Banks should sanction credit limits for such firms, which can be increased over time, she added.
The government, on its part, can give tax incentives and simplify tax procedures to move the SME sector away from cash, Bhattacharya said.
Watch an excerpt of the interview here: