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Home / Industry / Banking /  Measures for small businesses rely largely on risk-averse lenders: Care Ratings

MUMBAI: The government’s initiatives for small businesses, including the 3 trillion collateral-free loans that are expected to boost liquidity, depend largely on banks and non-bank financiers who have turned risk-averse, said a report by Care Ratings.

“The collateral-free loans as well as the subordinate debt schemes to support the micro, small and medium enterprises (MSMEs) are positive from the sector's perspective, but rely significantly on the banking as well as the non-banking financial company (NBFC) sector to provide funding," said the report published on 14 May.

Care Ratings said these institutions have recently lowered their risk appetite, which is reflected in the slowing credit disbursal ratio and parking of excess liquidity with the Reserve Bank of India (RBI). The report said due to these announcements, including moratorium advised to lenders, MSME bad loans may decline in the current year, but could witness a spike in the next year, especially if the business environment remains challenging.

As per RBI data, banks had an exposure of 15.1 trillion to small businesses engaged in manufacturing and services’ activities (year-on-year growth of 14.1%) and a gross bad loans ratio of 9.9% (up from 9.4% in FY18). NBFCs had outstanding credit of 80,000 crore to MSMEs engaged in manufacturing activities (y-o-y decline of 16.4%).

“With an increase in limits for definition of MSMEs and likely achievement of that process, the overall current exposure to MSMEs is likely to increase substantially," the report said.

Meanwhile, banks are yet to get clarity on the execution of these measures but believe that small businesses urgently need credit to survive till the time their cashflows improve. Some also believe MSMEs could potentially fall into a debt trap if the economic downturn continues, leading to a rise in delinquencies for lenders.

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