High rate regime likely to push up NPAs of MSME units

15 % of the country's total MSME units housed in Gujarat may be impacted.

Rising interest rates joined with low domestic demand and adverse global economic conditions has put micro-small and medium enterprises (MSME) in tight spot. Gujarat, which houses about 15 per cent of the country's total MSME units, is fearing a sharp increase in the NPAs in MSME segment during the high rate regime.

Reacting to the 25 basis points rate hike by Reserve Bank of India (RBI) on Friday, industry players termed the move as unwarranted and unfortunate. Industry players fear a sharp rise in the non-performing assets (NPAs) especially in the MSME segment as the economic condition continues to deteriorate.

"The demand is shrinking, which is prompting units to operate at lower capacity utilisation. Further, export scenario is also no longer attractive, hence there is less incentive for small industries to continue production. In addition to that, RBI keeps increasing rates. Such situation is feared to lead some of the MSME units to turn as NPAs," said Jaimin Vasa, chairman - MSME committee, Gujarat Chamber of Commerce and Industries (GCCI).

Echoing similar sentiments, bankers in the state are seem to be distressed about a probable rise in the NPAs in medium and large industries segment. "There is a likelihood of a possible rise in the NPAs of medium enterprises, which are more prone to default due to their high capital requirement. In priority sector, NPAs are feared to rise in the sponsored programmes," said a senior official of State Level Bankers' Committee (SLBC) - Gujarat.

According to data provided by SLBC, MSME borrowings in state during current fiscal have reached close to Rs 16,000 crore by June 2011. In fiscal 2010-11, borrowings by MSME sector stood at Rs 24,825 crore.

As per the SLBC details, NPA in MSME sector has almost remained stable with slight increase from past fiscal. The NPA in MSME segment for the year 2010-11 was recorded at 0.55 per cent to the gross advances, while in the current fiscal till June, 2011 the NPA stood at 0.56 per cent. RBI raised the repo rate and reverse repo rates by 25 basis points each at 8.25 per cent and 7.25 per cent respectively.

The state is home to nearly 400,000 MSME units employing over 3.5 million people in the state. "This is a major employment generating industry. But with rates being revised every quarter, it is getting tougher to sustain a business model for the small industry," said Atul Kapasi, president of Gujarat State Small Industries Federation (GSSIF).

"Forget growth, it is getting difficult to even sustain the operations of MSMEs in the current suffocating economic situation," said Kapasi, who is recently appointed as a member to working group on MSME growth for Twelfth Five Year Plan (2012-17).

In its recent study on asset quality of Indian banking institutions, the industry body the Associated Chambers of Commerce and Industry of India (ASSOCHAM) also recognised the need of an adequate insurance schemes for SMEs and agricultural sector, which are considered to be most vulnerable to turn NPA, to provide a meaningful cushion if the account turns bad.