A research report by State Bank of India (SBI) said the government’s Emergency Credit Line Guarantee (ECLG) Scheme saved around 14% of the outstanding loans to micro, small and medium enterprises (MSMEs) from becoming non-performing assets (NPAs). The survival of these 13.5 lakh MSMEs saved about 15 million jobs.

This optimism notwithstanding, the government and the Reserve Bank of India’s regulatory props may have only postponed the inevitable. According to the RBI, the MSME portfolio of public sector banks (PSBs) and private sector banks (PVBs) indicates accumulation in non-performing assets (NPAs) and SMA-2 categories in September 2021 relative to March 2021. Also, the transition of low and medium risk MSME borrowers to the high-risk category remains noteworthy.

For the PSBs, MSME NPAs have risen to 18.5% at the end of September 2021 from 16.8% at the end of March 2021, and against 18.2% at the end of March 2020. For the PVBs, MSME NPAs are down to 2.8%, against 3.6% in March 2021 and 4.3% in March 2020, but MSME loans 90 days past due have jumped to 2.1%, from 0.8% in March 2021 and 0.7% in March 2021.

It is clear that the slippage in asset quality due to the disruptions caused by Covid-19 has been prevented or delayed partly because of the imposition of the asset classification standstill.

Overall restructuring of MSME loans allowed under the RBI’s May 2021 scheme showed significant offtake. Still, there are slippages in MSME portfolios, particularly in the NPAs and SMA-2 (60 days past due) categories.

Credit flows to MSMEs

Credit to the MSME segment slowed down year-on-year by the end of September 2021 vis-a-vis March 2021. The decline was particularly noticeable in the sub Rs 25 crore ticket size across major bank groups.

Under the ECLG Scheme, loans amounting to Rs 2.82 lakh crore were sanctioned till November 12, 2021, of which Rs 2.28 lakh crore was disbursed (Rs 1.94 lakh crore by all scheduled commercial banks, forming 20.6 per cent of the incremental credit during the period). According to RBI, an analysis of detailed disbursal data reveals that guarantees of value up to Rs 1 crore formed 51% of the aggregate guarantees. Sixty-six per cent of the guarantees have been issued to MSMEs.

In 2020-21, a total of Rs 9.5 lakh crore of loans were disbursed to the MSME sector, which is significantly higher than Rs 6.8 lakh crore in 2019-20. The SBI Research report says this sharp jump in MSME lending was supported by the ECLG scheme, which provided 100% credit guarantee to lenders. The micro and small enterprises loans of banks are around 80% of the total MSME loan portfolios.

 Policy responses moderated the impact of the Covid-19 pandemic on financial markets and financial institutions. The overarching goal was to maintain the soundness of the banking and financial system. The policy interventions helped alleviate stress experienced by individuals, MSMEs, corporates and lenders, and by keeping access to finance open on easy terms.

The loan restructuring framework helped relieve the stress of the MSME borrowers. Incipient stress among banks remains in the form of increased proportion of restructured advances and the possibility of higher slippages arising from sectors that were relatively more exposed to the pandemic. RBI expects banks to shore up their financial with the green shoots of economic recovery re-emerging in the first half of 2021-22.