MSME liquidity crunch is real: Bank credit to small businesses falls for first time in 14 months

The banks’ credit outstanding to the MSMEs (Micro, Small and Medium Enterprises) has fallen for the first time in the past 14 months, contrary to the Reserve Bank of India’s (RBI) claim two weeks ago that there is no sign of liquidity squeeze in the sector. According to the latest RBI data for the month of September 2018, the credit outstanding to the MSME sector dropped by 1.4% over the same period last year, the sharpest contraction since February 2017 when the sector was continuing to reel under the impact of demonetisation.

In February 2017, the credit outstanding to the segment had contracted 5.2% from the corresponding period a year ago.

There was a shift towards tightening credit flow to MSMEs in September month and this decline in credit flow is expected to go higher for the month of October and December 2018, once the data for the same is available, The Indian Express reported citing experts. This is also the same month (September 2018), when the debt-ridden lender IL&FS defaults crisis came into light.

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The overall bank credit outstanding and that to the industry segment, including MSME sector, however, rose 11.3% and 2.3%, respectively during the month over the same period last year, data showed. If the MSME sector were to be excluded, then within the industry segment, the situation was better for medium and large-scale industries, which saw credit outstanding expand by 3.3 and 2.9 per cent respectively.

It may be noted that MSME, which accounts for about 45% of manufacturing output and 40% of the total exports in the country, is facing difficulties in raising funds. “Even the government is trying to push liquidity for MSME players and that shows that there is some recognition of the fact that there are some issues,” D K Joshi, chief economist at CRISIL told the newspaper.

Last month, at the Financial Stability and Development Council meeting, which was chaired by the finance minister Arun Jaitley and attended by the RBI governor Urjit Patel and others, the government had raised concerns over the persisting liquidity crisis in non-banking financial services companies (NBFCs). The RBI, however, said that there is a healthy credit growth and no sign of a liquidity crunch.

Meanwhile, both the central bank and the RBI are in talks for the last two weeks to relax certain norms, in order to ease credit flow to MSMEs.