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India’s policymakers wish to reduce the economy’s pain through credit targeted specifically towards small businesses that contribute roughly 25% to the gross domestic product (GDP). The government’s credit guarantee schemes, and the forbearance measures by the Reserve Bank of India (RBI) are all to push lenders to increase cheaper credit to micro, small and medium enterprises (MSME).

But banks are the horses that refuse to drink this water despite being dragged off and coerced to do so. In fact, if the contraction in bank credit to MSMEs is anything to go by, the schemes are not making a big impact.

Analysts at Bank of America’s research wing point out that this does not augur well for an economic recovery. “Declining credit flows continue to point to a GDP contraction of 11% in the September quarter and 7.5% in FY21 due to the Covid-19 shock," said Bank of America in a note dated 2 September.

As of July, loans to MSMEs had shrunk 4.96% year-on-year, data from the RBI shows. Indeed, on a year-to-date basis for FY21, the contraction is a massive 10.5%. The pain seems more stark as a moratorium on repayments was in force since April and 65% of MSME loans were under moratorium in that month. The proportion of loans under moratorium have declined since then but MSME loans continue to have a bigger share in the overall loan book covered by a repayment holiday.

To be sure, the emergency credit line guarantee scheme where the government provides 100% credit guarantee has seen disbursals of 1.1 trillion up to August, according to data provided by the government. This is 63% of the 3 trillion envisaged when this scheme was operationalised in May. Despite these disbursals, the overall credit flow is still a trickle.

While this is an indication that small businesses still do not have an easier and cheaper access to credit, part of this is also due to their unwillingness to borrow. Most hit by the pandemic and the ensuing lockdown, small businesses have no clarity on future revenues or cash flows. While direct support from the government is the only way out, it may be hard to come by given a hamstrung fiscal situation.

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