The advances to Micro, Small and Medium Enterprises (MSMEs) are growing at a good pace, as banks are turning liberal in sanctioning loans.
The data pertaining to the fourth quarter ended March 31, 2022 as well FY22 show increase in MSME advances compared to previous year, which was hit by the uncertainties of the Covid-19 pandemic.
An analysis of last two years data of Reserve Bank of India shows huge surge in loans to MSMEs. The outstanding micro and small loans as on March 2022 grew by 21.5 per cent to ₹4,95,281 crore as against ₹4,07,675 crore as on March 2021.
The advances to medium enterprises were more phenomenal and stood at ₹2,42,269 crore as on March 2022 (₹1,41,339 crore as on March 2021), registering 71.4 per cent growth.
The growth in advances was quite significant if one looks at the comparable figures of FY 21 with those of FY20.
The lending to micro and small businesses grew only at 4 per cent as on March 2021. The growth in loans to medium enterprises, however, was at 34 per cent.
Although they cannot be classified as MSME loans, the disbursal of petty business loans under Pradhan Mantri Mudra Yojana (PMMY) has also regained traction in the current financial year.
The total loans disbursed under the scheme stood at ₹3.31 lakh crore during FY22 as against ₹3.11 lakh crore disbursed during the previous financial year.
“Apart from general economic environment and relief from the pandemic, schemes like 2 per cent interest subvention scheme for Shishu category of Mudra loans are driving growth,” said an official of Mudra.
A revision in the definition of MSMEs with effect from July 1, 2020 has also been one of the drivers of lending to the sector, according to analysts.
Fourteen years after the MSME Development Act came into existence in 2006, a revision in MSME definition was announced in the Aatmanirbhar Bharat package.
As per this announcement, the definition of micro manufacturing and services units was increased to ₹1 crore of investment and ₹5 crore of turnover.
The investment limit of small unit was increased to ₹10 crore and ₹50 crore of turnover. Similarly, the limit of medium unit was increased to ₹50 crore and ₹250 crore of turnover.
“The impact of this revision has been noticed in FY 22 with more number of firms coming under the bracket of MSMEs which obviously pushed up the quantum of lending to these units,” said a field officer (advances) with State Bank of India.
The general business environment has also been improving for the last five months with the third relief from the third wave of Covid-19 pandemic, I added. The quarterly data of advances for major banks show credit pick up from November-December, which peaked in the fourth quarter of the last financial year.
In May 2021, the RBI allowed the lending institutions to restructure loans of MSMEs and directed the lending institutions to put in place a Board approved policy on restructuring of MSME advances. This also gave relief to MSMEs as well as banks and had a positive impact on fresh demand and supply of loans, say bankers.
The Emergency Credit Line Guarantee Scheme (ECLGS), which has been introduced as part of the Covid-19 relief package, has been another driver.
The Union Budget 2021-22 also increased credit availability. Budget allocation for FY 2021-22 for the MSME more than doubled to ₹15,700 crore vis-a-vis ₹7,572 crore in 2020-21. In addition, a corpus of ₹10,000 crore for provision of guarantee for borrowings gave a relief to the sector.
While growth in MSME lending is obviously welcome, there are few challenges too. “Even as the outlook of credit growth looks positive in FY23 also, the current inflation trends could play a spoilsport as rate hikes could have a dampening impact on credit demand just as the economy has been turning round the corner,” said a recent research report of State Bank of India.
The link between the policy rates and credit growth is well-established as RBI studies indicate that an increase in policy rate by 100 basis points causes the credit to decline by 1.95 per cent with a lag of six quarters. As RBI had already increased the repo by 40 basis points in May, this may impact credit demand from MSMEs.
Another challenge is the issue of Non-Performing Assets (NPAs) in the segment. According to analyst reports, bad loans in MSME portfolio increased from 8.6 per cent in FY19 to 12.6 per cent and 12.5 per cent in FY20 and FY21, respectively. The data for FY22 is not yet available.
Credit growth to MSMEs is vital as they contribute significantly to the economic and social development of the country by fostering entrepreneurship and by generating employment opportunities.
The relative importance of MSMEs can be gauged from the fact that the share of MSME Gross Valued Added (GVA) in total GVA (current prices) for 2019-20 was 33.08 per cent, according to Economic Survey 2021-22.
According to latest data of the Ministry of MSME, Out of a total 6.34 crore units, 3.25 crore (51.25 per cent) are in rural area and remaining are in the urban areas. Hence, credit flow to these units is important for growth of manufacturing and employment generation. About 10 crores are employed in the sector.
May 22, 2022