A security guard stands at the gate of the Reserve Bank of India (RBI) headquarters in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)

FSR: RBI Warns Against High MSME Loan Growth

The Reserve Bank of India said the recent impetus on loans to small businesses by public sector banks could have come at the cost of risk assessment standards.

State-owned banks, especially those facing lending restrictions under the prompt corrective action framework, have grown their base of credit to micro, small and medium enterprises since March 2017, the central bank said in its latest Financial Stability Report.

Public sector banks under the PCA managed to grow their MSME loans of Rs 1-5 crore by 166 percent in the year ended March 2018, according to the RBI. Total loans to small businesses rose to Rs 60,280 crore by March 2018 compared with Rs 22,680 crore a year earlier. “Such a sharp increase may require examination of possible dilution of credit standards further and additions to supervisory strategy for PCA banks.”

The RBI’s assessment comes as Prime Minister Narendra Modi promised loans to small businesses in 59 minutes. The sector, still recovering from the twin shocks of the cash bank and the goods and services tax, contributes more than a third of India’s GDP.

The central bank’s assessment showed that 2 percent of the Rs 1-5 crore loans of government banks under PCA in FY18 turned bad. This, according to the regulator, is too high a rate. Public sector banks outside the PCA have also shown a higher rate of NPAs in the segment.

New-age private banks and non-banking finance companies have not shown the kind of deterioration in asset quality as public sector lenders, the regulator found.

“Given the importance of this segment as also the health of the PSBs, targeted monitoring of segmental performance specifically with regards to growth rate as also quality... is required to be in place so as to ensure better screening of credits across all thresholds.”

Also read: FSR: RBI Says Bank NPAs May Fall To 10.3% In March 2019