Credit growth to small businesses remains flat despite govt’s push; here’s what RBI data shows

The credit outstanding to MSEs as of September 27, 2019, to MSEs stood at Rs 10,56,600 crore

Credit and Finance for MSMEs: Amid the Narendra Modi government’s stress on the credit boost to micro and small businesses (MSE), the gross bank credit grew by 6.2 per cent as on September 2019 from the year-ago period even as with respect to the current financial year, the growth contracted by 1 per cent. The credit outstanding as of September 27, 2019, to MSEs stood at Rs 10,56,600 crore up from Rs 9,94,504 crore as on September 28, 2018. The amount as on March 29, 2019, was Rs 10,67,175 crore, according to the RBI November bulletin.

However, the change in figures has been marginal. For August 2019, the growth remained at 6.1 per cent YoY while for July 2019, it stood at 7.8 per cent. Similarly, contraction in credit remained at 1.8 per cent for the two months since the beginning of the financial year.

“Small businesses are badly in need of funds not for setting up a new factory but for addressing the current liquidity crisis they are facing. The money is required for Opex, not Capex. Most SME lending outside India is based on ‘informational collateral’ instead of physical collateral. But bankers in India are not aware of businesses’  details or exposed to the sector’s intricacies. They only care about seeking collateral to give loans. What’s required is to understand their business, capital need, payments cycle, who is their buyers, etc.,” Anil Bhardwaj, Secretary-General, Federation of Indian Micro and Small & Medium Enterprises told Financial Express Online.

Also read: Not only Amazon, Flipkart, banks, brands too part of ‘unholy’ nexus of discounting, CAIT to Piyush Goyal

Finance ministry in June this year had directed heads of public sector banks to do an in-depth analysis with respect to challenges faced by MSMEs in accessing credit and the progress made. In another move, RBI had in September this year had made it mandatory for banks to link their retail and small business loans to an external benchmark from October 1.

MSME Minister Nitin Gadkari in order to encourage small business to list on stock exchanges to raise capital had recently said that the government will buy 10 per cent of the bonds issued by small businesses. The ministry, Gadkari claimed, has been in talks with the Finance ministry for seeking the sanction of a Rs 10,000-crore fund to purchase equity in SMEs who are looking to list themselves in bourses.

“If there will be a contraction in lending or would remain flat then it would also reflect on the GDP. Then there shouldn’t be worry around GDP slowdown. If the government won’t put money in productive assets and will only remain interested in earning taxes then how would bring growth back. Private sector investment has completely gone dry,” said Bhardwaj.

Credit growth in manufacturing MSEs shrank by 3.8 per cent in the financial year so far while YoY contraction stood at 0.7 per cent. For services MSEs, credit deployment saw growth of 0.5 per cent in the FY so far while it grew by 10.2 per cent YoY, according to the November bulletin citing data till September 2019. “In services, there is no large chain in procuring raw material unlike manufacturing and hence you need more working capital in comparison to services,” Bhardwaj added.