Despite the Union Budget encouraging banks to lend to stressed MSMEs, banks worry these loans could become NPAs without relaxed classification rules. On Tuesday, Finance Minister Nirmala Sitharaman announced a new mechanism to ensure continued bank credit to MSMEs during their stress period. She stated that while in the special mention account (SMA) stage for reasons beyond their control, MSMEs need credit to sustain their business and avoid becoming NPAs. This credit availability will be supported by a guarantee from a government-promoted fund.
According to a senior bank official from a large public-sector bank, if a firm has defaulted on repayment, then the risk profile of the borrower has worsened. “In such a scenario, extending further loans will not help but banks run the risk of default by the borrower.”
Banks categorise a loan in SMA if there is a default. There are three categories: SMA 0 – when principal or interest payment is not overdue for more than 30 days but the account shows signs of incipient stress; SMA 1 – when principal or interest payment is overdue between 31-60 days; and SMA 2 – overdue between 61-90 days. If repayment is due for more than 90 days, the loan is treated as sub-standard – the first category of non-performing asset.
They reference the one-time restructuring facility provided during the Covid-19 pandemic, which allowed banks to recast debt without additional provisioning. Normally, debt restructuring requires extra provisioning.
Commenting on the Budget’s impact on banking and financial services, CRISIL noted that MSMEs often lack sufficient collateral and their financial records frequently do not meet banking standards. CRISIL added that credit guarantees for MSMEs are a positive step, but their implementation and impact will be crucial to monitor.
CRISIL estimates the funding gap for MSMEs to be between Rs 20 trillion and Rs 25 trillion.
Bank loans to micro and small enterprises accelerated during 2020-21 and 2021-22, benefiting from the Emergency Credit Line Guarantee Scheme (ECLGS) launched in May 2020. However, growth rates have since declined.
According to the latest Reserve Bank of India data, bank credit to micro and small industries grew at a slower pace of 9.9% year-on-year until June 2, 2024, compared to overall bank loan growth of 15.4%. Loans to medium enterprises grew by 11% during the same period.