npa-crisis-in-msme-sector

The Reserve Bank of India (RBI) raised concerns about the rise of NPAs in Mudra loans, the government’s flagship small loans programme.

  • U.K. Sinha-led expert committee has recommended reforms in  the MSME sector in July 2019 report.

About MSME sector in India 

  • In India, MSMEs, which include all firms with physical capital valued at less than ₹10 crore, employ millions and are considered an engine of growth.
  • Credit exposure to MSMEs increased by 12% to ₹15.7 trillion in June 2019 (from ₹14 trillion in June 2018), according to data from TransUnion CIBIL, a credit information company, and Small Industries Development Bank of India (Sidbi).
  •  But this engine is now sputtering. Several forces, such as GST and demonetization, have constrained MSME growth but an overarching factor has been a severe liquidity crunch.

NPA crisis in the MSME sector

  • According to a 2018 study, the MSME sector has a credit gap of around ₹26 trillion with 90% of this gap felt by micro and small enterprises.
  •  In March 2010, 17.3% of total bank credit was deployed to MSMEs but in March 2019 this had shrunk to 13.6%.
  •  To make up for the shortfall, MSMEs resort to informal channels of credit which come with a significantly higher cost of capital.
  • The MSME sector may also be becoming vulnerable to the NPA issue that has stricken the Indian economy.
  • Firms in the bigger credit exposure segment (exceeding ₹25 crore) have NPA rates of around 18%.
  • In the June 2019 quarter, 16% of all PSB MSME credit was NPAs nearly three times the rates in private banks and NBFCs.
  • According to the U.K. Sinha report, this explains around 41% of all stressed loans in the MSME sector.

Reason for the huge NPA in MSME sector 

  • MSMEs can be more vulnerable to NPAs is the nature of their work.
  •  Most small enterprises, both formal and informal, are embedded in supply chains where they supply their products and services to larger firms.
  •  Consequently, these smaller firms constrained by their weaker bargaining power become dependent on larger firms.
  • Banks are wary of the risks associated with MSMEs and hence reluctant to lend
  • Assessing the credit-worthiness of MSMEs can also be difficult, especially in the absence of financial details.
  • Small firms, for instance, find it more difficult to withstand a sudden change in competition or regulation.

Way-forward

  • As per the recommendation of UK Sinha committee, establishment of   ₹10,000 crore “fund of funds" to support private equity and venture capital investment into MSMEs  to ease the liquidity crunch.
  • Establishing ₹5,000 crore stress fund and to  work in tandem with bank-led NPA revival plans.

 

The U. K.Sinha-led panel, formed by the Reserve Bank of India to look into the issues of micro, small and medium enterprises, recommended :

  • Review of the legislative framework- The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 may be reimagined as a comprehensive and holistic MSME Code having a provision for sunset on plethora of complex laws scattered all over the legislative framework.
  • Change in the definition of MSMEs- from current investment based to turnover-based definition, as it would be more transparent, progressive, easier to implement. It will also remove the bias towards manufacturing enterprises in the existing definition.
  • Setting up a ₹5,000 crore stressed asset fund for domestic micro, small and medium enterprises (MSMEs) in a relief to small businesses hurt by demonetization, the goods and services tax and an ongoing liquidity crunch. 
  • Form a government-sponsored Fund of Funds of ₹10,000 crore to support venture capital and private equity firms investing in MSMEs.
  • Small industries face problems of delayed payments and hesitate to enforce legal provisions available to them under the MSME Development Act due to their weak bargaining power. 
  • It recommended an amendment to the Act, requiring all MSMEs to mandatorily upload from time to time all their invoices above an amount to be specified by the government to an information utility. This mechanism will entail automatic display of the names of defaulting buyers and also act as moral suasion on them to release payment to these suppliers, said the report.
  • SIDBI should deepen credit markets for MSMEs in underserved districts and regions by handholding private lenders, such as non-banking financial companies and micro finance institutions. 
  • The PSBLoansIn59Minutes.com portal also cater to new entrepreneurs, who may not necessarily have information like GSTIN, income-tax returns and bank statement. PSBLoansIn59Minutes.com is an online marketplace that enables in-principle approval of MSME loans up to ₹1 crore in 59 minutes from public sector banks.
  • Obtaining regular sanctions from the banks post in-principle approval had not been smooth. As on 7 June, banks had sanctioned ₹40,156 crore to 127,000 units through this portal.
  • include introduction of adjusted priority sector lending guidelines for banks to specialize in lending to a specific sector
  • Doubling the collateral-free loan limit to ₹20 lakh
  • Providing insurance coverage to MSME employees by the government.
  • The main problem of MSMEs is the financial issue. To solve this, both the central and State governments must immediately clear all dues towards supplies and services rendered by MSMEs within 30 days. Recently, the RBI allowed lenders to recast loans of stressed MSMEs with loans up to ₹25 crore.