In the first quarter, bank credit growth to SMEs slowed

According to Reserve Bank statistics, the growth of bank lending to Micro, Small and Medium Enterprises (MSMEs) has slowed year over year in the first three months of the current fiscal.

The biggest employment in the country and the backbone of the economy, the MSME sector, claimed banks are unwilling to lend to small businesses due to their risk aversion, which slows down the expansion of bank credit.

According to the most recent Reserve Bank statistics, loans to medium-sized businesses increased by 13.2% in June (up from 47.8% in June of previous year) and by 13% (up from 29.2% in June of last year), respectively.

 

At the end of June, there were Rs 2,63,440 crores in gross bank credit outstanding to medium-sized businesses as opposed to Rs 2,32,776 crores in June of the previous year.

 

Credit outstanding for micro and small businesses in June was Rs 6,25,625 crore, compared to Rs 5,53,675 crore in the same month of 2022.

 

Credit to medium-sized businesses increased by 18.9%% in May compared to the same month previous year (up from 42.9%), while credit to micro- and small-sized businesses increased by 9.5% (up from 32.7%).

 

Another set of RBI statistics for April shows that compared to previous year, the loan growth for medium-sized businesses was just 19.1%. When compared to the same month a year before, the growth for micro and small industries was 29.8% in April 2022 and 9.7% in April 2023.

 

While the RBI statistics indicated double-digit increase in bank credit to MSMEs, which may imply a free flow of institutional financing to MSMEs, the reality is that securing bank loans is a difficult challenge for individual MSMEs, according to FISME Secretary General Anil Bhardwaj.

 

“Processes and procedures do not set a ceiling on the credit obstacles for MSMEs. The main obstacle is the banking system’s philosophy, which treats each credit extended to MSMEs as a possible bad loan and attempts to ring-fence the sanction process, according to the speaker.

 

The entire credit gap in the MSME sector is reportedly in the region of Rs 20 to Rs 25 lakh crore, according to the Expert Committee on Micro, Small, and Medium Enterprises, which was established by the Reserve Bank of India in December 2018.

 

A concerted effort should be made by the government, according to Puneet Kaura, Managing Director & CEO of Samtel Avionics, an MSME that primarily produces goods for the railroad and defense industries. Samtel Avionics is an MSME that produces products for the rail and defense industries.

 

“The ecosystem, which favors large borrowers currently, needs to change in favor of MSMEs that employ a large workforce and will also play a crucial role in the times to come to make the country a developed nation by 2047 as desired by Prime Minister Narendra Modi,” he added.

 

At the end of March, the total non-performing advance held by MSMEs was Rs 1,31,928 crore, down from Rs 1,54,094 crore the previous March and Rs 1,82,114 crore the following March.

 

MSMEs in India are having trouble getting loans from banks and other financial institutions, according to Rohit Arora, co-founder and CEO of Biz2Credit, because of things like collateral restrictions, a lack of credit history, and excessive interest rates.

 

Despite initiatives to increase loan accessibility, he said, MSMEs still face a credit gap that requires further assistance and creative ideas to close.

 

Banks’ reluctance to provide credit to MSMEs is a cause for worry because of things like collateral requirements, the informal character of firms, a lack of financial records, risk perception, and high levels of non-performing assets (NPAs) in the banking industry. MSMEs have a hard time getting loans because of these issues, according to Arora.

 

In order to increase credit flow to the MSME sector, the government has taken a number of actions.

 

The loan ceiling for Guarantee Coverage under the loan Guarantee Scheme for Micro & Small Enterprises has been increased from Rs 2 crore to Rs 5 crore with effect from April 1, 2023, and the yearly guarantee costs have been decreased by 50%.

 

The government has also disclosed a Fund of Funds as part of the Atmanirbhar Bharat packages, which would inject Rs 50,000 crore in equity into MSMEs with the capacity and feasibility to develop.