MSMEs' input costs rising, but risk to restructured loan book could fall

The war in Ukraine is pushing up input costs for MSME: the latest crisis for a sector that first battled a slowdown in 2020 and then Covid-19 for two years.

The troubles usually would mean a bleak scenario for MSME (Micro, Small and Medium Enterprises), marked by the risk of defaults and an uptick in bad loans. However, rating agency Crisil’s view earlier this financial year that MSME’s restructured credit pool will improve adds a twist. CRISIL's revised outlook last week said that only one fourth of recast loans are at risk of becoming non-performing assets (NPAs), as against its earlier assessment of half the loans.

About six per cent of MSME’s loan pool of Rs 20 trillion is restructured, which was done in 2020-21 and 2021-22 during the pandemic. The old assessment saw loans worth Rs 60,000 crore turning bad but under the revised scenario put the amount at Rs 30,000 crore, said Krishnan Sitharaman, deputy chief rating officer at Crisil.

Bankers said besides restructuring and government-backed emergency credit lines, improved business amid rising economic growth is aiding capacity for debt servicing.

Prashant Kumar, managing director and chief executive officer of YES Bank, said the outlook for MSMEs is a "positive surprise" as the assessment was that post Covid-19 there will be higher stress on their loan portfolio. They are able to service liabilities, he said.

Takeaways from Crisil’s number crunching shows MSME’s EBITDA margins improved by 50-100 bps in the last fiscal (FY22) to 4.5-5.5 per cent thanks to partial pass-on of rising input costs. Margins are expected to reach pre-pandemic levels this fiscal, driven by rising revenue, easing commodity prices, and improving utilisation.

Risks remain

Loans to MSMEs are linked to external benchmarks. When interest rates increase, expenses will go up. If MSMEs are unable to pass on input costs to their customers, then units, especially weaker ones, are likely to face difficulties, said a senior executive of a private bank.

The highest proportion of share in recast loans belongs to high risk followed by medium risk (CMR-4 to CMR-6) and lowest share in low risk.

Analysis by Credit Information Bureau CIBIL highlighted that those loans restructured due to COVID-19 require stringent portfolio monitoring from lenders to observe how the entities are faring in terms of repayments.

Portfolio monitoring and transition of the portfolio through a degree of risks would enable lenders to proactively identify further stress and take corrective action.