Second wave: 60% addition to bad loans from MSMEs

THE SECOND wave of Covid has thwarted the recovery process underway across sectors, with the lockdowns in states and the spread of disease overwhelmingly impacting the MSME and service sectors, according to fresh data coming in on loan slippages with banks and micro-lenders.

From hotels, tourism, transport and aviation to trade and small manufacturing units, specific pockets of the economy are beginning to report a disproportionate impact of the distress, both in the form of decline in incomes and rise in loan repayment defaults.

The impact of this going forward could be two-fold: any improvement in the overall consumption trajectory is heavily contingent on a recovery in services sectors such as trade, hotels, transport, communication & services related to broadcasting, which supports over 20 crore households; and corporates in the listed space, which have reported better growth numbers, could end up feeling the distress in the unorganised segment.

MSMEs and micro enterprises have been the most impacted with nearly 60 per cent of addition to Non Performing Assets (NPAs) in April and May coming from MSMEs, nearly twice what it was earlier. The pandemic impacted businesses by the second week of April itself, said a senior Indian Bank official.

“Slippages are mainly coming from MSME. About 60 per cent of the NPA (of April and May) is from the MSME sector. This used to be between 30-40 per cent earlier. The elements of the defaults are labour constraints, transportation issues due to lockdown, non-availability of raw material and uncertain cash flows,” the banker said.

Micro finance companies, lending unsecured funds to micro entrepreneurs, have witnessed a decline in collection efficiency owing to protracted Covid curbs. “Loans in arrears for over 30 days or the portfolio at risk (PAR) could rise to 14-16 per cent of portfolio this month from a recent low of 6-7 per cent in March,” rating firm Crisil said.

“Our customers who are majorly small traders and business people engaged in daily use products, were unable to open their shop and their livelihood has been accordingly impacted,” said P N Vasudevan, managing director and CEO of Equitas Small Finance Bank.

The Retailers Association of India said retail sales in the month of May 2021 stood at -79 per cent of the pre-Covid level of sales on a year-on-year comparison with May 2019. “Retailers are looking forward to some improvement in the month of June with gradual unlocking. However, the retail industry needs collective support from various government bodies,” said Kumar Rajagopalan, CEO, Retailers Association of India.

Indian Hotels, which reported a loss of Rs 524 crore in FY2021, said its business was severely impacted during FY21 on account of Covid. “During the second half of the year, the company witnessed some signs of recovery of demand, especially in leisure destinations. Whilst there has been a second wave of the pandemic in the last few months in some states, there has also been increased vaccination drive by the Government and the company continues to closely monitor the situation,” it said.

Consumer confidence in the current period, which has been in the negative territory since July 2019, fell to a record low in May 2021. The current situation index dropped to 48.5 in May 2021 from 53.1 in March, according to the Reserve Bank of India consumer confidence survey.

Air traffic is expected to slump in fiscal 2022 and fully recover only by the fourth quarter of next fiscal because of the debilitating consequences of the second Covid wave in India, Crisil said. Passenger traffic at airports has nosedived, with average daily domestic passenger traffic halving in May 2021 from February 2021, or to a mere 10 per cent of pre-pandemic levels seen in May 2019.

In the automobile sector during the month of May, factory dispatches of passenger vehicles and two-wheelers contracted to one-third of the previous month, while three-wheelers made negligible sales of just about 1,200 units. Cumulative sales of five players in the commercial vehicles industry was nearly half the levels of the previous month.

According to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, the overall consumption trajectory will depend on the recovery in services like “trade, hotels, transport, communication & services related to broadcasting”, which support roughly 25 crore households. Corporates, in the listed space, reported better growth numbers across parameters in the fourth quarter of FY21, but this trend may soon reverse, he said.