Growth in credit to micro and small enterprises (MSEs) in the manufacturing sector plunged to -2.2 per cent and -0.5 per cent in fiscals 2016 and 2017, respectively, compared with 23.7 per cent and eight per cent in 2014 and 2015. The sharp contraction came as non-performing assets (NPAs) in the MSE segment started rising, which compounded the corporate stressed assets problem for banks, even as investment demand remained weak.
CRISIL analysed the NPA trend in MSE priority sector loans of the top five public and private sector banks. Between fiscals 2014 and 2017, average gross NPAs more than doubled from 5.4 per cent to 12.6 per cent for public sector banks, while it was range-bound at 1.8-2.4 per cent for private banks.
Additionally, the implementation of goods and services tax (GST) means MSEs would need incremental working capital for tax compliance, especially for first-time taxpayers, for which they will seek bank finance. However, frazzled lenders are unlikely to be enthusiastic till the stress from NPAs abates.
Public sector banks, which account for nearly 70 per cent of lending to this segment, would also prefer to focus on stressed accounts. For years, banks have also found it a challenge to assess the creditworthiness of small borrowers, and it is here that MSE-specific credit ratings would come in handy. The government’s recent push towards a less-cash economy and GST will create digital transaction trails, and data so captured can be proxy inputs for credit evaluations when assessing the cash-flows of potential borrowers.