MSMEs grapple with stress even as govt grants more time for restructuring

Muted demand, non-payment by large customers, and unwillingness on the part of banks to restructure loans takes a toll on the sector

With Micro, Small and Medium Enterprises (MSMEs) grappling with the problem of delayed payments and slowdown in demand, the sector remains under major stress, even as the government has extended the restructuring deadline by a year.

According to both, banks and MSMEs, repayments have been delayed by more than a month in a large number of cases. Some firms have even delayed by up to 120 days. Banks are required to tag an account as a non-performing asset if the loan has not been serviced for more than 90 days.

“Delayed payment is a major concern in the MSME segment. Also, MSMEs do not wish to clash with their buyers as demand is muted. The restructuring exercise can be useful, but banks are not keen to restructure the accounts. As a result MSMEs are struggling for survival,” said Chandrakant Salunkhe, president, SME Chamber of India.

With muted demand and stress, credit growth in the sector remains suppressed. Data from Reserve Bank of India suggests that in the micro and small segment, credit growth has been negative at -3.4 per cent, in the first eight months of the current financial year (till November end). For medium enterprises it was -3.6 per cent. On a year-on-year basis too, credit growth till November 2019 in both micro and small, as well as medium enterprises has been negative at -0.1 per cent and -2.4 per cent respectively.

In January last year, the Reserve Bank of India (RBI) allowed a one-time restructuring of existing MSME loans that have defaulted, but weren't non-performing as on January 1. The original deadline of March 31, 2020 was extended by a year to March 31, 2021 in the recent Union Budget.

According to banks. MSME loans of about Rs 2 trillion were identified to be restructured by March 31, 2020. According to sources, banks hope to meet at least 70 per cent of this target.

A senior banker with a public sector bank said while banks have been keen to restructure the MSME accounts, in some cases this was not feasible as it would only mean deferring the NPAs. Data from TransUnion Cibil suggests NPA rates in the MSME segment rose from 11.7 per cent in September 2018 to 12.2 per cent in September 2019.

“Due to non-payment by corporates, the MSME segment is reeling under pressure. On top of that, demand is muted and banks are also not eager to extend credit,” said Biswanath Bhattacharya, President, Federation of Small & Medium Industries, West Bengal.

Notably, for a number of small enterprises, proper account norms and adherence to accounting and regulatory norms has been a stumbling block in qualifying for restructuring, according to an executive of a public-sector bank (PSB).  

“We are witnessing more and more MSMEs coming forward for restructuring. However, we might need to tweak the fineprint a bit to make the exercise more attractive and viable,” said a top official of another public sector lender.

Apart from one-time restructuring, the government has been announcing a slew measures to improve credit flow to the sector.

In order to address the working capital needs of MSMEs on account of stress arising from delayed payments, PSBs are offering up to 25 per cent enhancement in working capital limits for standard MSME accounts as a standby line of credit.

Banks have also launched an MSME outreach initiative for restructuring stressed standard assets.