Economy
Lessons from giving more credit to MSMEs, in charts
Summary
- Access to the formal banking system has been a perennial issue for micro and small enterprises. But as the performance of a government scheme to provide additional credit to such enterprises shows, it can yield some dividends.
Easy and timely credit can make a world of difference to micro and small enterprises. The Centre’s Emergency Credit Line Guarantee Scheme (ECLGS) further drives home this point. Launched in March 2020 to extend additional loans to small enterprises in the wake of the covid-19 pandemic, the ECLGS has enabled lenders to give additional credit of ₹2.36 trillion as of February 2022. This has helped these enterprises restart operations and repay vendors, while battling to improve their credit profile.
Under ECLGS, the Centre provided 100% guarantee to banks and non-banking finance companies (NBFCs) for additional credit given to existing borrowers. When launched, existing borrowers with an outstanding credit of up to ₹25 crore and with dues of up to 60 days were eligible to borrow 20% more of their loan outstanding. The maximum loan tenure was four years, and interest rate was capped at 9.25% for banks and 14% for NBFCs. Over time, these terms have been relaxed, and the amount has grown.
Importantly, ECLGS has benefited relatively small borrowers. Data from the central bank shows that between December 2019 and December 2021, the biggest increase in credit outstanding has been in segments categorized as very small (total credit of below ₹10 lakh), micro ( ₹10 lakh to ₹1 crore) and small ( ₹1 crore to ₹10 crore). Further, according to a December 2021 report by TransUnion CIBIL, while 90% of ECLGS borrowers were from the first two categories, they accounted for 30% of disbursements, or about ₹70,000 crore in additional credit.
Timely credit
With the Centre covering behind them, banks and NBFCs loosened their purse-strings at what was a pivotal time for many of these borrowers. The several dimensions of this additional credit are documented by the same TransUnion CIBIL report. The cut-off date for the study was March 2021, a year into ECLGS. It covered about 85% of the amount disbursed, and was supplemented by a survey of 756 micro, small and medium enterprises (MSMEs).
About 41% of survey respondents used the ECLGS funds to restart business operations. Further, another 40% used it to clear vendor dues and 12% to pay salaries to employees. Each of these measures is about sustenance, as opposed to promoting growth. About 75% of the ECLGS credit went to sectors that are heavily dependent on people movement, which suffered due to the covid-19 pandemic. These included retail and wholesale trade, transport, professional services, tourism, hotels and restaurants.
Benefits and risks
The additional credit helped borrowers in multiple ways. About 68% of survey respondents said they felt “positive" about their business after availing ECLGS. The average outstanding balance reduced for ECLGS borrowers, led by the very small and micro segments. This indicates borrowers using the additional credit to smoothen cash flows and repay the loan. The drop for them was significantly more than that for borrowers who didn’t avail of ECLGS.
At the same time, amid a challenging time for businesses, a risk build-up is seen in ECLGS accounts. On the one hand, non-performing assets (NPAs) are lower among ECLGS borrowers and standard accounts are similar. On the other hand, a larger share of ECLGS are classified as special mention accounts (SMAs), which indicates interest/principal due for up to 90 days. What is, however, also seen is a greater ability of ECLGS accounts to improve—from NPA to SMA, and from SMA to standard accounts.
Shades of exclusion
According to a March 2022 government reply in the Rajya Sabha, about 11.7 million businesses had availed of the ECLGS, 95% of them MSMEs. The 2019-20 annual report of the MSME ministry shows India having 63.3 million MSMEs, which shows the extent of their exclusion from the formal banking sector. ECLGS, while benefiting MSMEs, was only for those who had an ongoing loan with banks or NBFCs.
Even among ECLGS beneficiaries, more than half in the very small and micro segments said it was “not easy" to avail of it. This shows the friction embedded in the system, partly a function of MSMEs’ credit profiles. According to a March 2021 TransUnion CIBIL report, only 18% of MSME borrowers had a low-risk CMR (CIBIL MSME rank), while 52% were ranked medium risk and 30% high risk. That vicious circle needs to be broken, and it will take more than initiatives like ECLGS to do so.
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