MSME Credit Growth Slides While Bad Loans Rise: Report
Workers cut designs out of leather hides in the design section of a footwear workshop in Uttar Pradesh. (Photographer: Udit Kulshrestha/Bloomberg)

MSME Credit Growth Slides While Bad Loans Rise: Report

Growth in credit to the country’s small businesses continued to slide in the June quarter and bad loans rose.

Credit growth across micro, small and medium enterprises, and mid-sized corporates fell, showed data put out by TransUnion Cibil and Sidbi in the quarterly MSME Pulse report. In the case of mid-sized corporates, credit growth fell to 3.6 percent in the quarter ended June over a year ago. While credit to MSMEs grew at a faster clip of 12 percent, growth was lower than in the previous quarter, shows comparative data from the last four editions of the MSME Pulse report.

The sharp fall in credit growth partly reflects the liquidity crunch faced by non-bank lenders after the collapse of Infrastructure Leasing and Financial Services in September last year. The impact of that continues to play out since NBFCs have limited room to grow and are significant providers of funding to MSMEs.

NBFC credit to MSMEs rose 13.7 percent between June 2019 and June 2018. This is much slower than the 39.4 percent growth seen in NBFC credit to this segment between June 2017 and June 2018. Further, NBFC credit outstanding declined by 1 percent over the January-June 2019 period compared with the same period last year. NBFCs credit growth was at 17.9 percent last year in the January-June period.

Public sector banks have traditionally been the largest lender to the MSME sector. Over the few years, private banks and NBFCs have successfully managed to gain market share from public sector banks on MSME lending. However, in the quarter ending June, the share of NBFCs has declined for the first time in the last two years. NBFCs have also witnessed an increase in NPA rates in the same period.
MSME Pulse Report (October 2019 Edition)

Bad Loans Rise

Bad loans across all categories of the MSME segment rose, although they remained below the default rates for large corporates.

Mid-sized corporates had the highest ratio of non performing assets at 17.5 percent. For SMEs, the NPA ratio rose to 10.6 percent, while for micro enterprises the NPA ratio stood at 8.7 percent.

“Growth in credit exposure is proportional to gross NPA amount in Micro and SME segment and therefore the NPA rate remains range bound. Crucial to note that NPA rate in commercial lending was at a peak of 17.2 percent in June 2018,” the report said.

“In the case of NBFCs, in particular, the absolute NPA amount has also increased in the range of 25-28 percent. The NPA rate for NBFCs has escalated to 5.9 percent in the quarter ending June 2019 from 4.4 percent in June 2018,” the report said.

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