Credit for growth: Enhanced credit flow to boost MSME investment, growth

At the recently held National MSME Cluster Outreach Programme, Union Finance Minister Nirmala Sitharaman announced measures expected to help micro, small, and medium enterprises (MSMEs). The government has increased the lending target for scheduled commercial banks and non-banking financial companies (NBFCs) to MSMEs this financial year by Rs 1.54 trillion, aiming for a credit flow of Rs 5.75 trillion in 2024-25. The target has subsequently increased to Rs 6.21 trillion and Rs 7 trillion for 2025-26 and 2026-27, respectively. In this context, public-sector banks (PSBs) are expected to take the lead in lending to MSMEs because growth in outstanding loans for PSBs was only 9.2 per cent over the last two financial years, while the corresponding figures for private banks and NBFCs were much higher at 25 per cent and 39 per cent, respectively. 

Additionally, the government is set to launch a Rs 100 crore credit-guarantee scheme for MSMEs, expected to be approved by the Union Cabinet soon. Under the scheme, collateral-free and guarantor-free term loans will be extended to MSMEs to boost their manufacturing and export potential. This follows the Emergency Credit Line Guarantee Scheme (ECLGS), which was fairly successful in meeting the liquidity and working-capital needs of the enterprises during the pandemic.

 

Loans to MSMEs have remained healthy, growing 20.1 per cent year-on-year as of March 2024. Yet, around 99 per cent of the MSME units in the country qualify as microenterprises and lack economies of scale. The current policy landscape in India perpetuates this problem by incentivising MSMEs to remain small. Although labour laws have been streamlined into four labour codes, they await implementation. Be that as it may, easier access to credit can help MSMEs to scale up. Recently, the government also enhanced the limit of Mudra loans for entrepreneurs who successfully repaid previous loans in the “Tarun” category. Moving from collateral-based lending to cash flow-based lending can reduce some of the friction in the credit ecosystem. Further, the deepening of the Account Aggregator (AA) framework and the launch of the Unified Lending Interface (ULI) are expected to improve financing for MSMEs.

 

However, caution must be exercised while extending loans. It is important to ensure that credit push doesn’t affect underwriting standards, particularly for PSBs, which can lead to a buildup in non-performing assets (NPAs). Since credit is growing at a healthy pace, lenders must properly evaluate businesses before extending credit. As things stand, in 2023-24, NPAs on Mudra loans for PSBs declined to 3.4 per cent, an improvement from 4.89 per cent in 2019-20 and 4.77 per cent in 2020-21. Private-sector banks performed relatively well, registering Mudra loan NPAs at 0.95 per cent in 2023-24. The MSME sector has the potential to emerge as a growth engine by increasing exports and generating employment. Thus, enabling a better institutional flow of credit in this area can help MSMEs invest and compete in the market.