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The prolonged distress in small businesses owing to the two covid-19 waves has begun permeating into other sectors in the economy, manifesting in rising loan defaults across retail segments, latest bank data showed.

Sectors like housing loans, believed to be among the most resilient, also saw ripples of stress as customers defaulted on repayments. The June quarter financial results of banks show how despite a push from the government for fresh loans to small businesses, they did default on existing obligations. Bankers said that small business owners who defaulted on business loans also saw their other loans getting classified as bad.

For instance, India’s largest lender State Bank of India (SBI), where half of all home loans are to non-salaried borrowers, witnessed a deterioration in mortgage asset quality in the June quarter. SBI’s outstanding mortgage portfolio stood at 5.05 trillion as of 30 June, with a 59 basis point (bps) sequential rise in bad loans.

“...many of the SME borrowers also would be the ones to avail home loans. I think essential stress seen in this book is on account of disruption in cash flows for the SMEs. Our home loans are to first-time buyers. So, there will be all efforts and endeavour on their part to honour their obligations," SBI chairman Dinesh Khara told reporters on 4 August.

To be sure, SBI is not the only bank witnessing stress in the small business segment. Others like Punjab National Bank (PNB) and Bank of Baroda (BoB) have also seen deterioration in asset quality in this particular segment. While 23.23% of PNB’s micro, small and medium enterprise (MSME) loans are classified non-performing as on 30 June, it is at 16.7% for BoB in the same period.

“In the case of MSMEs, (a) little stress is still there and we expect the improvement only by March 2022 in respect to upgradation of the accounts. As far as slippage is concerned, it has almost reached maximum. I do not expect any further slippages in the next few quarters in a big number from MSME," said S.S. Mallikarjuna Rao, chief executive, PNB.

Rao told analysts on 3 August that small businesses have been passing through a tough time since January 2019 or even late 2018, and that was why the central bank opened a window for restructuring. Covid-19, he said, has only aggravated that.

It is pertinent to note that the stress in this segment is despite government-guaranteed loans or Emergency Credit Line Guarantee Scheme (ECLGS) and debt recast permitted by the central bank. Bankers said that loans that slipped in the June quarter were not eligible for restructuring under the Reserve Bank of India’s (RBI’s) guidelines. To be sure, SBI management said it has received a good response to the restructuring scheme and of the 7,300 crore of recast requests under the second phase of the scheme, about 1,400 crore came from small businesses.

In fact, RBI is also closely watching stress in MSMEs and retail loans. Deputy governor M.K. Jain told reporters on 6 August that it is aware of it but is not alarmed.

“Yes, there is a visibility on a little bit of stress from the past data, but definitely it’s not alarming. We are constantly engaged with the regulated entities, particularly the outlier banks and the outlier NBFCs (non-banking financial companies) and we also conduct stress tests," Jain said.

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