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finance | IST

MSME pulse check: Credit demand back to pre-COVID levels

Lending to the MSMEs (micro, small and medium enterprises) rose significantly in the past year. The demand for credit from MSMEs seems to be picking up after the second wave of COVID-19. In fact, the index of credit enquiries tracked by SIDBI-TransUnion shows that credit demand in the MSME sector may already be back to pre-COVID levels.

Lending to the MSMEs (micro, small and medium enterprises) rose significantly in the past year. The demand for credit from MSMEs seems to be picking up after the second wave of COVID-19. In fact, the index of credit enquiries tracked by SIDBI-TransUnion shows that credit demand in the MSME sector may already be back to pre-COVID levels.
The credit demand surged following the unlock after first wave, and a similar trend is playing out after the second unlock. The reading on the index of credit enquiries fell sharply from March to April before inching up in May and now have reached almost to the levels that were last seen in March 2020.
The government guarantee cover played a big role in pushing up credit for the sector. Throughout last year, credit to MSMEs has jumped to Rs 6.8 lakh crore in FY20 by 40 percent in FY21 to almost Rs 9.5 lakh crore by the end of the year. This is a huge jump in MSME lending in 2021 largely supported by the ECLGS- under which banks have lent almost Rs 2.69 lakh crore as of June.
The total on-balance sheet commercial lending exposure in India stood at Rs 74.36 lakh crore as of March 2021, which has seen a 0.6 percent growth rate but compared this to MSME growth rate within that segment, that stood at over Rs 20.21 lakh crore as of March, which is a 6.6 percent growth rate over the previous year.
Non-performing assets (NPAs) in this segment has also been increasing for all of the lenders from December to March. The NPA levels of private banks have been quite stable from September 2020 till March 2021. However, the NPA rates of public sector banks had reduced from September to December 2020 but again increased to 17.4 percent in March 2021.
Non-banking financial companies (NBFCs) have shown steady growth in NPA rates during this period. One of the reasons for an increase in NPA rates of NBFCs is the most pronounced because of the slowdown in MSME credit growth for them because of their own liquidity problems.
The overall stress in the MSME portfolio remains high at 12.5 percent as of March 2021 and if the high retail stress reported by a handful of banks so far is anything to go by, the second wave may add more stress in this segment.
So while this surge in credit to MSMEs - who are the backbone of our economy - is good news- lenders also need to remain vigilant about the credit quality of this portfolio.
CNBC-TV18’s Ritu Singh put all this in perspective.