The MSME Conundrum

Post the announcement of 59 minutes loan of Rs.10 million for micro, small and medium enterprises (MSMEs) by Prime Minister Narendra Modi, the Reserve Bank of India has gone a step ahead by allowing banks and non-banking financial companies (NBFCs) to undertake a one-time restructuring exercise of MSME borrowers who are stressed but are yet to be classified as non-performing loans (NPLs).

As per rating agency ICRA’s estimates, the MSME loans under the forbearance stood at less than Rs.100 billion for the banking sector as on September 30, 2018 and the credit to MSME entities (less than Rs.250 million) stood at Rs.10.70 trillion for the banking sector, apart from Rs. 2.5 trillion from other lenders. With loan restructuring window available till March 31, 2020, the rating agency expects that MSME entities that could avail the restructuring option can increase, as even borrowers, who are marginally overdue on repayments, can avail of the benefit. In effect, it will ease their cash flows through lower debt repayment.

What is rather interesting is that the central bank had earlier frowned upon schemes aimed at asset quality forbearance, but in light of rising interest rates and liquidity squeeze, following the NBFC crisis, it seems the RBI has taken a lenient view on MSMEs.

According to a report by Kotak Institutional Equities, with a gradual push towards formalisation and higher availability of income disclosures on account of GST, credit growth has ramped up in recent quarters with NBFCs and private banks outpacing public banks. Hence, the move to give forbearance to SMEs even before any signs of stress by lenders has raised eyebrows. “We are quite surprised at the timing of the notification. Lenders usually step back lending when early warning indicators suggest rising trends of deterioration. However, the last available data (Q1FY19) suggests that lenders have been quite comfortable and growing this portfolio at a healthy pace,” states the report.

Incidentally, the RBI’s financial stability report has suggested the need for public banks to tighten credit screens for MSME borrowers and it seems that banks are just doing that. According to reports, under the 59 minutes scheme in-principle approvals were only given to 31,000 applicants out of 60,000. In November, Modi had mentioned that the pilot project had managed to get 73,000 MSMEs on-board and were sanctioned loans worth Rs.235 billion.

However, in the absence of any other data, it’s not clear how much the scheme will benefit SMEs and with Uday Kotak already raising concerns over how collaterals are being valued for small-sized loans, it’s not clear if the banking system is sitting on a MSME time bomb. Any indication of that will be visible in the Q3 results of banks and NBFCs, till then it’s anybody’s guess.