RBI: MSME credit growth slowed during note ban
MINUTE EFFECT GST didn’t seem to have had any significant impact, says study MUMBAI:
Credit growth in the micro, small and medium enterprise (MSME) sector, which had started slowing even before demonetisation, declined further during the demonetisation phase, a Reserve Bank of India (RBI) study on Friday said.
However, during the June quarter of FY 2019, it said, bank credit to MSMEs increased on average by 8.5% year on year, mirroring the level of growth seen during April-June of FY 2016.
By contrast, the rollout of the goods and services tax (GST) does not seem to have had any significant impact on credit, RBI’s Mint Street Memo ‘How have MSME Sector Credit and Exports Fared?’ said.
According to a separate set of RBI data, as of November 26, 2016—just over two weeks after the November 8 announcement of demonetisation—bank credit to MSMEs had fallen by 3.4% year-on-year. By December 2016, this had plummeted further to 4.3% year on year.
“The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of GST. For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation. Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net,” the study explained.
MSMEs, the central bank study said, face constraints in accessing credit through formal channels because of their nature of operations—about 97% of MSMEs operate in the informal sector.
“A large number of these firms depend on informal channels because of easy accessibility and availability of credit without any documentation hassles and mortgages, even though the rate of interest on such loans may be very high. The challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation relating to accounts, income and business transactions,” said the latest Mint Street Memo, brief reports on topical subjects.
According to it, loans are provided to the MSMEs mainly through appraisal of their collaterals rather than an assessment of their true business potential. “Further, banks do not trust start-ups, view such loans as risky and thus do not prefer extending finance to MSMEs,” it added.
Within the formal financial sector, MSMEs receive loans mainly from banks (around 90%). The study found that the share of credit provided by banks has declined since September 2016 partly reflecting the risk aversion of banks due to a deterioration in their asset quality.
“In contrast, loans extended by non-banking financial companies (NBFCs) to MSMEs grew strongly at an annual average rate of 35% during the same period and their share in total credit almost doubled from around 5.5% in December 2015 to around 10% by March 2018. Lower non-performing assets (NPAs) of NBFCs in MSME credit as compared to banks might have helped them in extending credit to the sector,” the study said.
It said the share of credit extended to MSMEs in overall bank credit had declined steadily to around 14% by end-March 2018 from about 17% in 2007 which could partly be due to over-lending to large corporates—now stressed—in the second half of the 2000s.
Bad loans of both public sector banks and private banks pertaining to the micro, small and medium enterprise sector have increased over time, with the level being much higher in the case of PSBs.
“Despite rise in NPAs, credit to MSMEs by public sector banks (PSBs) recovered in the second half of 2017-18. As against this, the growth in credit to MSMEs by private banks (PVBs) decelerated during this period, although credit growth of PVBs remains higher than that of PSBs,” it added.