Banks must not turn away MSMEs

Crisil said recently it expects stressed loans—NPAs and restructured accounts—in the MSME portfolio to rise to as much as 18% by March 2022.

Even as loan growth languishes at around the 6% level, the numbers on delinquencies are starting to confirm bankers’ worst fears about the state of MSMEs. Bad loans under the Pradhan Mantri Mudra Yojana (PMMY) had risen to nearly 12% as on March 31, 2021, the Micro Units Development & Refinance Agency (Mudra) has said in a response to a Right to Information (RTI) query filed by this newspaper. In FY21, Rs 3.12 lakh crore was disbursed across a little over 5 crore PMMY loans. So far in the current year, a little over 2 crore loans have been given, totalling to Rs 1.14 lakh crore.

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Given how the State Bank of India (SBI) has confirmed a fifth of its Mudra exposure has turned non-performing, chances are the second wave of Covid-19 in April-May would have aggravated the situation, particularly in the micro-loans segment. The pandemic has hit small businesses hard, and while the government has done well to back smaller businesses by issuing guarantees under the Mudra scheme and, more recently, through the emergency credit line guarantee scheme (ECLGS), given the extent and scale of Covid’s ravages, that fallback option may not be enough. The ECLGS has been extended till March 2022, or until a total of Rs 4.5 lakh crore has been loaned. Until early July, an amount of Rs 2.14 lakh crore had been disbursed against an outlay of Rs 3 lakh crore.

Banks’ exposure to the micro and small enterprises segment, at Rs 3.9 lakh crore on August 27, 2021, was up 10% from a year ago. The outstanding bank loans to the medium enterprises segment was only Rs 1.7 lakh crore on the same date. Bankers confirm that had it not been for the ELCGS, the exposure to MSMEs would have been smaller. While the government is bankrolling the ELCGS to some extent, banks have turned wary of borrowers becoming over-leveraged. It is ironic that lenders today are so cautious about small-ticket loans to genuine borrowers when, not so long ago, they were disbursing loans in thousands of crores to large corporate borrowers, clearly without proper appraisal since much of it did not come back. Corporate defaulters have left lenders with NPAs running into several lakh-crores of rupees. Yet, today, when most banks are much better capitalised, they are reluctant to lend to small enterprises. Not only has the government infused large sums of capital into state-owned lenders, the provision coverage ratio (PCR) at most banks is more than comfortable.

Crisil said recently it expects stressed loans—NPAs and restructured accounts—in the MSME portfolio to rise to as much as 18% by March 2022. That could be possible. Also, an NPA in one account impacts loans for the customer in other categories too. Nonetheless, even if they need to downgrade all loans of a customer, if one account turns bad, banks should continue to support the relatively stronger enterprises. Any blanket aversion to lending to small units, at this juncture, would hurt the nascent recovery. As is well-known, the informal economy is way bigger than the formal sector and employs many more people; it needs support.

Should the third wave of the pandemic elude us, many of the troubled units can be resuscitated. Banks should utilise the provisions that they have created to help small units. At the end of the day, banks are meant to take calculated risks, not turn their backs on any asset that doesn’t fetch a AAA rating.