Lenders favour MSME loan restructuring over moratorium amid stress

Banks prefer restructuring MSME loans over moratoriums to maintain credit discipline, as stress from US tariffs and the West Asia crisis raises concerns over repayment capacity

Lenders to micro, small and medium enterprises (MSMEs) are batting for restructuring loans rather than offering a blanket moratorium on their servicing, a model that was last exercised during the Covid-19 pandemic.

 

Of late, MSMEs have once again come under stress on account of the tariffs imposed by the United States (US) as well as the more recent conflict in West Asia, which has severely impacted India's energy supply, particularly liquefied petroleum gas (LPG). While tariffs affected exporters, the current crisis in West Asia could affect more MSMEs.

 

“A moratorium affects credit discipline; and the repayments balloon over time. It is better to restructure the loan based on assessment made by the lenders and the borrower concerned,” said a banker.

 

What relief measures are being considered for MSMEs?

 

The authorities are now weighing a stress-relief package for MSMEs akin to the lifeline extended during the pandemic.

 

The Emergency Credit Line Guarantee Scheme (ECLGS) was launched in May 2020 as part of the Aatmanirbhar Bharat package to support eligible MSMEs and business enterprises in meeting their operational liabilities due to disruption caused by the Covid-19 pandemic. The scheme was operational till FY23. As reported by the Department of Financial Services, under ECLGS, since inception till FY23, a total of 1.13 crore guarantees covering a value of Rs 2.42 trillion have been extended to MSMEs.

 

What do business sentiment indicators suggest for MSMEs?

 

Before the West Asia crisis, the Small Industries Development Bank of India’s (Sidbi’s) MSME Business Confidence Index (M-BCI) had stood at 60.8, marginally lower than the previous quarter but well above the expansion threshold of 50. The forward-looking sentiment strengthened meaningfully, with the Business Expectations Index (M-BEI) rising to 63.7 for January–March 2026 and further improving to 65.0 for one year ahead, signalling an optimistic business outlook in the near term.

 

“The West Asia crisis has affected MSMEs, but loan or interest waivers would be unhealthy for not only the lending community but also for the borrowers,” said Ravindra Kumar, advisory board member, SME Chamber of India. His view is that such measures create a precedent, injecting expectations for the future too. “Why only loan waivers and interest waivers? Why not extend the impacted MSMEs tax rebates or encourage them to bring in cost austerity in such crisis situations?”

 

And that large buyers from MSMEs must be directed to pay on the spot; and this would provide a cash flow cushion.

 

What is the funding outlook and credit gap for MSMEs?

 

According to a recent report by B2K Analytics, MSMEs’ total funding requirement is estimated to reach Rs 162.92 trillion by 2030. On the supply side, formal credit availability is projected at Rs 78.02 trillion. This includes Rs 56.98 trillion from priority sector lending, Rs 18.57 trillion from banks, and Rs 2.46 trillion from non-banking financial companies. An additional five per cent of the funding gap is expected to be met through informal sources, while around 30 per cent will be supported by promoters’ own capital infusion. Despite these sources, according to B2K Analytics, the unmet funding requirement for MSMEs is estimated at Rs 55.18 trillion by 2030.

 

“Our projections reflect strong long-term growth trends in terms of expansion in MSMEs’ contribution to GDP. Formal credit growth is also expected to move in tandem. However, despite the growth momentum, there remains a substantial and widening credit gap in the MSME space, demanding an urgent need to expand formal financing channels,” noted Ritaban Basu, chief executive officer (CEO), B2K Analytics.

 

MSME contribution to India’s gross domestic product (GDP) is projected to increase to 40 per cent from the current 30 per cent by 2030. India’s GDP is expected to reach Rs 537.96 trillion, assuming sustained economic growth. This would place the MSME segment’s contribution at approximately Rs 215.18 trillion, underscoring its expanding role in the economy.

 

What policy measures are shaping MSME financing?

 

The Union Budget for FY27 followed through on the steps taken in its previous edition for MSMEs. This included the move to lower the turnover threshold for buyers to around Rs 250 crore from around Rs 500 crore on the Trade Receivables Discounting System (TReDS), an invoice discounting platform. It also brought in an additional 22 central public sector enterprises and 7,000 companies into play.

 

On the credit side, banks were asked to accommodate MSMEs even if some of them were in the special mention account category for reasons beyond their control (this was to be supported through a guarantee from a government-promoted fund). Even though off-record, bankers were of the view that they would not like to run afoul of the central bank's supervisory role in case such loans turned into non-performing assets (NPAs)? Given the forbearance nature of these decisions, they would rather wait for the RBI's guidance.

 

Plus, the earlier revisions in TReDS guidelines (June 7, 2023) enabled insurance for financiers so that they could hedge against default risk, expanded the pool of financiers, and enabled a secondary market for factoring units.

 

The latest Economic Survey notes that nearly Rs 8.1 trillion is tied up, which has knock-on effects on working capital. “When an MSME files a delayed payment case against a buyer, it may strain or even damage the business relationship. Buyers may perceive the filing as an adversarial step and may stop placing new orders or discontinue the partnership altogether. Since MSMEs rely heavily on long-term commercial ties, the fear of losing future business prevents them from pursuing legal options, even when large dues remain pending,” the Survey said.

 

The 2019 report of the Expert Committee on MSMEs headed by U K Sinha held that most large firms deal with MSMEs on a credit basis and buyers do not honour invoices on time. MSMEs, too, hesitate to file complaints against large buyers. In effect, buyers use MSMEs as a funding avenue — an alternative to banks. What few say on record is that while discounting systems such as TReDS are changing the game, more needs to be done.

 

It may be recalled that last month, microfinance institutions facing higher risk provisions and write-offs were extended a Rs 20,000 crore credit-guarantee scheme, aimed at easing liquidity tightness and increasing credit flow. The scheme will be effective from March 20 until June 30 (or when cumulative guarantee coverage reaches Rs 20,000 crore, whichever is earlier).

 

Highlight points:

· A moratorium affects credit discipline; and the repayments balloon over time

· It is better to restructure the loan based on assessment made by the lenders and the borrower concerned

· The Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs launched in May 2020 through FY23 covered 1.13 crore guarantees with a total value of Rs 2.42 trillion

· A report by B2K Analytics said MSMEs’ total funding requirement is estimated to reach Rs 162.92 trillion by 2030.

· The latest Economic Survey noted that nearly Rs 8.1 trillion is tied up, which has knock-on effects on working capital.