MSE credit growth slips into red first time since Covid last year; share in gross bank credit declines

The RBI has asked banks to closely monitor their exposure to MSMEs and retail businesses witnessing high stress.

Credit and Finance for MSMEs: Bank credit growth to micro and small enterprises (MSEs) during the first month of the financial year 2021-22 registered negative growth, latest data by Reserve Bank of India on year-on-year (YoY) growth in gross bank credit deployment showed. Amid Covid’s second wave, which seemingly took a toll on small business lending, banks deployed Rs 10.60 lakh crore in April, down 2.2 per cent from Rs 10.84 lakh crore in April 2020. Importantly, the contraction in MSE credit growth in April 2021 was the first since Covid struck last year.

The negative growth in credit deployment in April followed the lowest YoY growth of 2.5 per cent recorded in March 2021 since its previous deepest plunge to 1.5 per cent in May 2020. The fall reflected the possible impact of the second wave of the Covid pandemic that had started to hit in February. Last year, the credit growth had bounced back to 6.5 per cent in June after two months of decline.

The share of MSEs in India’s gross bank credit also continued to decline for the fourth straight month. From 12.11 per cent in December 2020, the MSE share contracted to 12.09 per cent in January 2021, 11.8 per cent in February, 11.3 per cent in March, and now further down to 9.7 per cent in April. The overall gross bank credit as of April 2021, stood at Rs 108.60 lakh crore – up 5.7 per cent from Rs 102.73 lakh crore, according to the RBI’s June bulletin. On the other hand, the YoY credit growth to medium enterprises in April was 70.8 per cent to Rs 1.89 lakh crore from Rs 1.10 lakh crore in April 2020.

Meanwhile, the RBI has asked banks to closely monitor their exposure to MSMEs and retail businesses witnessing high stress. In its bi-annual Financial Stability Report, the central bank noted that that close monitoring of MSME and retail credit portfolios is warranted alongside the need for banks to reinforce buffers, improve governance and remain vigilant in the context of global spillovers.

“Since 2019, weakness in the MSME portfolio of banks and NBFCs has drawn regulatory attention, with the Reserve Bank permitting restructuring of temporarily impaired MSME loans under three schemes…Despite the restructuring, however, stress in the MSME portfolio of PSBs remains high,” said RBI. The government on Monday had enhanced the corpus of the Emergency Credit Line Guarantee Scheme (ECLGS) to Rs 4.5 lakh crore from Rs 3 lakh crore earlier as part of the Rs 20 lakh crore Atmanirbhar Bharat package announced in May last year.