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MSME loan delinquencies of NBFCs, MFIs likely to shoot up amid Coronavirus pandemic

Credit and Finance for MSMEs: While the SME sector has been grappling with multiple challenges including funding, uneven performance, a prolonged lockdown will “have material impact for the products/services offered by these set of borrowers.”

Credit and Finance for MSMEs: Microloan or MSME loan portfolios of non-banking financial companies (NBFC) and microfinance institutions (MFI) might see a significant increase in delinquency levels amid the Coronavirus epidemic as the lower-income groups, typically labourers and daily wage earners are likely to be hit hardest, according to the CARE Ratings analysis of the industry-wise impact of Covid-19. The impact would be visible “in the urban and semi-urban portfolios before spreading to the rural portfolios,” the credit rating agency said. The risk of delinquencies also exists for financiers offering unsecured loans to SMEs who typically rely on the assessment of the estimated cash flows with high yield. “Lockdowns, disruptions in supply chain and impact of large industries loans would increase immediate delinquencies in this segment,” the agency added.

With respect to loans given to SMEs against property, the signs of some stress are already visible amid cash flow pressure hurting SME borrowers, it added. Overall, while the SME sector has been grappling with multiple challenges including funding, uneven performance, a prolonged lockdown will “have material impact for the products/services offered by these set of borrowers.” While on one hand, it may restrict the demand for the products, the disruption in the supply chain, on the other hand, may push prices for raw materials up that may negatively hurt SMEs’ cash flows. As a result, paying timely debt is likely to remain a key challenge for SMEs.

Also read: Coronavirus slams brakes on online retail growth; drastically hurts 2020 forecast

Finance Minister Nirmala Sitharaman recently offered respite to MSMEs from financial distress amid the Coronavirus outbreak. The minister raised the threshold for default by MSMEs sharply from Rs 1 lakh to Rs 1 crore under section 4 of the Insolvency and Bankruptcy Code (IBC), 2016. “This will by and large prevent triggering of insolvency proceedings against MSMEs,” a press note issued by the Finance Ministry had said. “Now they (MSMEs) can focus on their work rather defending themselves before NCLT to save their business and assets. It will also help the judicial infrastructure as the number of cases to be filed will drastically reduce for the time being,” Rajesh Narain Gupta, Managing Partner, SNG & Partners told Financial Express Online.

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