Note ban slowed MSME credit, sector's exports dampened by GST: Study

Latest RBI data show credit to micro and small enterprises in June decelerated by 2.4% from March 2018

Credit to micro, small and medium enterprises (MSMEs) sector is showing healthy signs of recovery from the impact of demonetisation and goods and services tax (GST), says a study on the Reserve Bank of India (RBI) website. MSME credit saw healthy growth in recent quarters and has recovered since the lows of late 2017 to reach the mid-2015 level, it said. 

However, the latest RBI data shows credit to micro and small enterprises in June decelerated by 2.4 per cent from March 2018. MSME credit saw a year-on-year (y-o-y) growth of 0.7 per cent in June 2018 against June 2017.  

“Demonetisation led to a further decline in the already decelerating credit growth of the MSME sector while GST implementation does not seem to have had a significant impact on overall credit to MSMEs.” However, MSME exports appear to be affected more by GST implementation vis-à-vis demonetisation. 

M N Nair, chairman, CIBIL, said that the demand for credit is in double digits for loans up to Rs 100 million. The credit demand is expected to pick up as the GST system is stabilising, helping units to provide data.    

Credit growth fell significantly and turned negative during November 2016-February 2017. Therefore, it seems that demonetisation accentuated the slowdown in credit growth, particularly to the industrial sector, said the report. However, the growth in credit to the MSME sector recovered after February 2017 to reach an average of 8.5 per cent during January-May 2018.

While MSME exports showed only mild weakness post demonetisation period, they decelerated sharply during April and August 2017 (GST implementation period) with only a temporary recovery during the post-GST implementation period.

Industry credit, as a whole, saw y-o-y growth of 0.9 per cent in June 2018, against a contraction of 1.1 per cent in June 2017, according to RBI data. 

Senior public sector bank executives said banks have moved to the cash-flow based assessment of credit. Under the GST regime, it is beneficial to look at invoices for a credit decision. 

While around 90 per cent of MSME credit comes from banks, non-banking finance companies (NBFC) are rapidly increasing their share in the market. “Bank credit to MSME has declined since September 2016 partly reflecting the risk aversion of banks due to deterioration in their asset quality. In contrast, loans extended by NBFCs to MSMEs grew strongly at an annual average rate of 35 per cent during the same period and their share in total credit almost doubled from around 5.5 per cent in December 2015 to around 10 per cent by March 2018. While credit to MSME by public sector banks (PSBs) has reduced, the share of private banks has increased," said the report. 

This change in market share could be attributed to the lower NPAs of NBFCs and private banks in MSME credit as compared to PSBs.   

Highlights

• Demonetisation slowed down credit to MSMEs
• GST had a more adverse effect on MSME exports than note ban
• MSME credit is recovering to reach pre-demonetisation levels
• 90 per cent of MSME credit comes from banks
• NBFCs are seeing a faster MSME growth than banks due to lower NPAs
• PSBs have seen a growth in MSME credit while private banks have seen the deceleration
• NPAs in MSME segment is more for PSBs than private banks