Credit and Finance for MSMEs: Improper maintenance of financial statements, high cost of processing MSME loans relative to their loan size, lengthy loan processing exercise, lack of technical understanding etc. were among the key challenges in MSME lending.
Credit and Finance for MSMEs: Raising capital from banks continues to get easy for small and medium businesses (SME) as former reports easing of credit standards (guidelines to determine whether a borrower is creditworthy) for SMEs since first half of 2018, according to the 10th round of the FICCI-IBA Survey of Bankers for H2 2019. 44 per cent respondents (banks) in the survey said credit standards have eased — this is up from 5 per cent in H1 2018 to 14 per cent and 17 per cent respectively for H2 2018 and H1 2019. Importantly, the respondents’ share who reported no change in the standards declined from 68 per cent in H2 2018 to 78 per cent in H1 2019 and 44 per cent in H2 2019.
However, according to the RBI February bulletin, growth in bank credit to micro and small enterprises remained contracted till December in the current FY. Since April when the credit growth contracted at 0.1 per cent, the trend has continued till December during which the growth rate shrunk 0.5 per cent. The December bank credit to micro and small businesses was Rs 10.61 lakh crore — 5.7 per cent up from Rs 10.04 lakh crore in the year-ago period.
18 banks, which participated in the survey, said “improper maintenance of financial statements, high cost of processing MSME loans relative to their loan size, lengthy loan processing exercise, lack of technical understanding and limited affordability of digital payment platforms that restricts the use of digital payment options by MSMEs, and entrepreneurial risks faced by MSMEs,” are some of the challenges in MSME lending. However, in the coming six months, 56 per cent banks surveyed expected ease in credit standards while 33 per cent expected them to tighten.
Nonetheless, the banks also suggested measures in order to boost lending to MSMEs including capacity building through training programs, setting up an online platform to help banks accelerate the SME lending process, adopting tools such as using psychometric testing, cash flow estimates or Qualitative Credit Assessment (QCA) for assessing borrower’s creditworthiness. Banks also suggested controlling SME NPAs through steps such as the reclassification of Income Recognition and Asset Classification (IRAC) norms for MSMEs, due diligence and follow up, strict monitoring of funds’ use, etc.
Finance Minister Nirmala Sitharaman had late last month asked public sector banks to restructure all the remaining MSME loan accounts and disburse all sanctioned loans by March 15. Sitharaman told reporters after a meeting with PSU banks that out of 5.53 lakh MSME accounts, 5.28 lakh loans have been restructured. In her budget speech, the minister had said that more than 5 lakh MSMEs had benefited from the debt restructuring exercise in the last year.