BackMSMEs to bear the brunt of negative economic growth, says Crisil
The challenges would be the hardest for micro enterprises, which account for 32% of the total MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch
PremiumMUMBAI: Micro, small and medium enterprises (MSMEs), across sectors, will be severely impacted when the Indian economy contracts this fiscal, according to credit rating agency, Crisil.
The agency has predicted a 5% contraction and said as India Inc heads towards a 15% decline in revenue and 25% fall in earnings before interest, taxes, depreciation and amortisation (Ebitda), MSMEs will see a steeper fall in revenue of 17%-21%, while Ebitda margin will shrink 200-300 basis points (bps) to 4%-5%.
"A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front," the agency said in a recent report.
“In the process, average interest service coverage ratio could slide to 1-1.5 times from 2.4 times seen between fiscals 2017 and 2020, even after factoring in the benefit of moratorium on interest payments announced by the Reserve Bank of India (RBI). Sans moratorium, the ratio would have gone below 1," it added.
The challenges would be the hardest for micro enterprises, which account for 32% of the total MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch.
Previous downturns have shown that micro and small enterprises are unable to manage transient working capital challenges as easily as their large and medium peers. To that extent, the measures announced by the Ministry of Finance and the RBI, nudging banks and other institutions to lend more, will help them tide over tapered cash flows. The bigger issue, however, is demand, which needs to revive for growth to improve sustainably.
“The current facilitations may not have the heft to crank up demand in the near term because fiscal stimulus is limited and only to vulnerable households. It is critical that the demand curve is yanked steeply northwards, especially in discretionary products and services," said Amish Mehta, chief operating officer, Crisil.
“A three-pronged strategy is essential now: one, improve the sentiment around job security for formal and informal workers to boost consumption. Two, hasten implementation of the ₹3 lakh crore Aatmanirbhar scheme to ensure flow of liquidity to MSMEs continues. Three, and most importantly, lenders have to go beyond traditional credit processes because they have to play a seminal role in recovery. That will mean closer interactions with MSMEs to understand underlying drivers of business, and using innovations such as operational scorecards, digital platforms and alternative data for monitoring and underwriting," Mehta added.
Crisil believes that consumer discretionary, construction, and export-linked sectors will bear the brunt of the contraction.
In upstream sectors, inventory build-up and stretched receivables highlight the need for incremental working capital in the next one-two months. Given the varied pace of revival, the worst-affected ones such as construction, auto component makers and auto dealers do not expect a rebound before fiscal 2022.
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