MSMEs forced to approach moneylenders as PSBs steer clear despite govt push

While the average cost of bank lending to MSMEs is between 12-15%, it goes up to as high as 18% from NBFCs, and 24% from moneylenders

Despite a slew of measures to promote lending, public sector banks shied away from extending loans to micro, small and medium enterprises (MSME).

While owners of MSME firms say getting bank finance has become much difficult the past few years, various reports also indicate that the public sector bank funding has been coming down.

For example, according to data from TransUnion Cibil, between December 2013 and December 2018, the share of public sector bank credit to MSMEs fell by 19 per cent to 39 per cent. At the same time, the share of private banks went up from 10 per cent, and that of NBFCs by eight per cent, in the same period. According to a recent report by Omidyar Network and BCG, 40 per cent of lending to MSMEs being is met through informal sources, with interest rate twice as high as in the formal market.

According Chandrakant Salunkhe, founder and president of SME Chamber of India, one of the reasons for the closure of a large number of small manufacturing companies the past few years is lack of bank funding, other two reasons being impact of demonetisation and GST (goods and services tax). Data from the chamber suggests, close to one million manufacturing units closed down since demonetisation in 2016.

With many public sector banks remaining under prompt corrective action the past few years, credit availability to MSMEs had been impacted and these  firms have had to increasingly rely on moneylenders, says Suresh Subrahmanyan, Chairman Banking & Finance committee at All India MSME Association.

As a result, the cost of funds for MSMEs has soared.

While the average cost of bank lending to MSMEs is between 12-15 per cent, it goes up to as high as 18 per cent from NBFCs, and 24 per cent from moneylenders, Subrahmanyan says.

In January 2019, RBI has decided to permit a one-time restructuring of existing loans up to Rs 25 crore to MSMEs that are in default but ‘standard’ as on January 1, 2019, without an asset classification downgrade.  

However, according to MSMEs, not many banks have been keen on restructuring.

Poor credit availability from banks is linked to high accretion of non-performing assets (NPA) in MSME loans in the recent past.

While outstanding credit to MSMEs grew to Rs 25.2 trillion at the end of 2018 from Rs 10.4 trillion in 2013, the consolidated NPA in the sector rose to 9 per cent from 7.3 per cent, between 2013 and 2018, according to the report by TransUnion Cibil.

“The present NPA level in the MSME sector is nearly double digit, which indicates an unhealthy level of MSME lending. Much of this happened as the recovery environment vitiated,” says A K Pradhan, MD and CEO, United Bank of India.

Last year, the government started a scheme to sanction loans of up to Rs one crore via a dedicated portal, with a turnaround time of 59 minutes. The interest rate on such assistance starts at eight per cent.

Salunkhe says even after approval on the digital site, it takes about two months for actual loan approval.

“Earlier banks were sanctioning loans based on project size, but now they are only looking at GST figures, which is a big impediment in getting loans,” he said.