Micro and small loans as of March 2022 grew by 21.5 percent to ₹4,95,281 crore from ₹4,07,675 crore as of March 2021
Advances to Micro, Small, and Medium Enterprises (MSMEs) are increasing at a rapid rate, as banks become more liberal in loan approvals.
The results for the fourth quarter ended March 31, 2022, as well as the fiscal year ending March 31, 2022, demonstrate a rise in MSME advances compared to the previous year, which was hampered by the uncertainty of the Covid-19 epidemic.
An examination of Reserve Bank of India statistics from the previous two years reveals a significant increase in loans to MSMEs. Outstanding micro and small loans increased by 21.5 percent to 4,95,281 crore in March 2022, up from 4,07,675 crore in March 2021.
The advances to medium firms were even more spectacular, standing at 2,42,269 crore in March 2022 (from 1,41,339 crore in March 2021), or a 71.4 percent increase.
When comparing FY21 data to those of FY20, the increase in advances was rather large.
Lending to micro and small enterprises expanded at a 4% annual rate as of March 2021. Loans to medium-sized businesses, on the other hand, increased by 34%
Though not MSME loans, the disbursement of tiny business loans under the Pradhan Mantri Mudra Yojana (PMMY) has also regained traction in the current fiscal year.
Total loan amount
Total loans given under the plan were 3.31 lakh crore in FY22, up from 3.11 lakh crore in the previous fiscal year.
“Aside from the overall economic climate and pandemic alleviation, programs like the 2% interest subvention plan for Shishu category Mudra loans are driving development,” stated a Mudra official.
Drivers
A revision in the definition of MSMEs with effect from July 1, 2020, has also been one of the drivers of lending to the sector, according to analysts.
Fourteen years after the MSME Development Act came into existence in 2006, a revision in the MSME definition was announced in the Aatmanirbhar Bharat package.
As per this announcement, the definition of micro-manufacturing and services units was increased to ₹1 crore of investment and ₹5 crores of turnover.
The investment limit of the small unit was increased to ₹10 crores and ₹50 crores of turnover. Similarly, the limit of the medium unit was increased to ₹50 crores and ₹250 crores of turnover.
“The impact of this revision has been noticed in FY 22 with more number of firms coming under the bracket of MSMEs which obviously pushed up the quantum of lending to these units,’’ said a field officer (advances) with State Bank of India.
The general business environment has also been improving for the last five months with the third relief from the third wave of the Covid-19 pandemic, he added. The quarterly data of advances for major banks show credit pick up from November-December, which peaked in the fourth quarter of the last financial year.
In May 2021, the RBI allowed the lending institutions to restructure loans of MSMEs and directed the lending institutions to put in place a Board approved policy on the restructuring of MSME advances. This also gave relief to MSMEs as well as banks and had a positive impact on fresh demand and supply of loans say, bankers.
The Emergency Credit Line Guarantee Scheme (ECLGS), which has been introduced as part of the Covid-19 relief package, has been another driver.
The Union Budget 2021-22 also boosted credit availability. Budget allocation for FY 2021-22 for the MSME more than doubled to ₹15,700 crore vis-a-vis ₹7,572 crores in 2020-21. In addition, a corpus of ₹10,000 crores for the provision of a guarantee for borrowings gave relief to the sector.
Outlook
While growth in MSME lending is obviously welcome, there are a few challenges too. “Even as the outlook of credit growth looks positive in FY23 also, the current inflation trends could play a spoilsport as rate hikes could have a dampening impact on credit demand just as the economy has been turning around the corner,’’ said a recent research report of State Bank of India.
The link between the policy rates and credit growth is well-established as RBI studies indicate that an increase in the policy rate by 100 basis points causes the credit to decline by 1.95 percent with a lag of six quarters. As RBI had already increased the repo by 40 basis points in May, this may impact credit demand from MSMEs.
Another challenge is the issue of Non-Performing Assets (NPAs) in the segment. According to analyst reports, bad loans in the MSME portfolio increased from 8.6 percent in FY19 to 12.6 percent and 12.5 percent in FY20 and FY21, respectively. The data for FY22 is not yet available.
Credit growth to MSMEs is vital as they contribute significantly to the economic and social development of the country by fostering entrepreneurship and by generating employment opportunities.
The relative importance of MSMEs can be gauged from the fact that the share of MSME Gross Valued Added (GVA) in total GVA (current prices) for 2019-20 was 33.08 percent, according to Economic Survey 2021-22.
According to the latest data from the Ministry of MSME, Out of a total of 6.34 crore units, 3.25 crore (51.25 percent) are in rural areas and the remaining are in urban areas. Hence, credit flow to these units is important for the growth of manufacturing and employment generation. About 10 crores are employed in the sector.
Attribution-Business Line
