Watch out for MSME risk build-up amid Covid-19 pandemic, says report

The timely funding assistance backed by guarantee schemes spared micro, small and medium enterprises (MSMEs) from the hard knocks due to Covid-19 pandemic-induced downturn. But the system needs to be watchful of any risk build-up as the economy moves on the growth path, reveals an assessment by TransUnion Cibil-Small Industries Development Bank of India (Sidbi).  

The MSMEs in industry sectors that are dependent on consumer discretionary spends — hospitality, logistics, and textiles — show higher downgrades. The micro units have been impacted the most due to economic slowdown, compared to medium- and small-sized firms. 

According to MSME Pulse, a joint report of Cibil-Sidbi, the downgrades for low-risk borrowers — which stood at 24 per cent for September 2018-2019 — increased to 36 per cent for September 2019-2020. Similar downgrade trend was observed for the medium-risk segment, for which the downgrade was 22 per cent in September 2018-2019, and increased further to 29 per cent the following year.

V Satya Venkata Rao, deputy managing director, Sidbi, says, “As we move ahead on the path of growth, we need to monitor the risk build-up signs, especially in the MSME segment, which is witnessing comparatively higher downgrades”.

The default rates in September 2020 remained stable at 12.1 per cent, a level also seen in September 2019. But it was lower than the preceding quarter (13 per cent in June 2020).

The high credit infusion into the MSME segment since June 2020 onwards has provided a strong denominator to the gross non-performing asset (NPA) rates. However, NPA rates may be subject to change as the guidelines emerge.

The MSME sector has had a wobbly ride in 2020. While Covid-19 impacted business activity, a solid response from the government and the Reserve Bank of India supported growth.

Credit demand has resumed to pre-Covid levels, supported by Atmanirbhar Bharat of credit guarantee by the government. Public sector banks got the early-mover advantage by accelerating lending to MSMEs on the back of 100-per cent credit guarantee in the Emergency Credit Line Guarantee Scheme.

Year 2020 saw deep penetration of credit within the existing-to-bank segment because of the nature of the guarantee scheme. Due to less stringent and shorter lockdowns, non-metro regions led the resurgence in credit.