“The 5% contraction in the Indian economy expected by CRISIL this fiscal — wrought by the Covid-19 pandemic — will significantly hurt MSMEs across sectors,” the report said.
The micro, small and medium enterprises (MSMEs) are faced with an existential crisis due to contraction in the economy in financial year (FY) 2021 amid the Covid-19 outbreak, revealed a report by ratings agency Crisil. “The 5% contraction in the Indian economy expected by CRISIL this fiscal — wrought by the Covid-19 pandemic — will significantly hurt MSMEs across sectors,” the report said.
Crisil said India Inc was headed towards a 15% decline in revenue and 25% fall in earnings before interest, taxes, depreciation and amortisation (ebitda). However, for small businesses, the fall in revenue would be at 17-21%, while ebitda margin would shrink 200-300 basis points (bps) to 4-5%, as weak demand gnawed away gains from lower commodity prices, said Crisil.
Crisil saw consumer discretionary, construction, and export-linked businesses bearing the brunt. Small real-estate contractors in engineering, procurement, construction (EPC) projects, and ceramics and textiles makers had been significantly impacted, so their credit profiles were the most vulnerable, the ratings agency said.
“A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front. In the process, average interest service coverage ratio could slide to 1-1.5 times from 2.4 times seen between fiscals 2017 and 2020,” the report said.
This calculation was done after factoring in the benefit of moratorium on interest payments announced by the Reserve Bank of India (RBI). The ratio would have gone below one without the moratorium, the report said. RBI had provided moratorium to customers for three months from March 1, which was further extended till August.
“The challenges would be the hardest for micro enterprises, which account for 32% of the overall MSME debt, and are facing material stress.” the report said.
Amish Mehta, chief operating officer at Crisil, said, “A three-pronged strategy is essential now: one, improve the sentiment around job security for formal and informal workers to boost consumption. Two, hasten implementation of the Rs 3-lakh crore Aatmanirbhar scheme to ensure flow of liquidity to MSMEs continues. Three, and most importantly, lenders have to go beyond traditional credit processes because they have to play a seminal role in recovery.”