Small businesses seen facing big troubles as loan defaults climb

Source:, Jan 10, 2019

MUMBAI: Loan defaults are rising at India’s vast small enterprises sector at a time large corporate debtors are beginning to put their house in order, data from credit information bureau TransUnion Cibil showed.

According to the bureau’s latest MSME Pulse report, bad loan ratio in the micro, small and medium enterprises (MSME) segment rose 50 basis points (bps) from a year ago to touch 12.2% at the end of September, the latest period for which data is available. At the same time, bad loan ratio for commercial loans declined 20 bps year-on-year to touch 16.8%. One basis point is one hundredth of a percentage point.

The report said credit growth stood at 7.7%, 4.6%, and 1.9% for micro, small and medium enterprises, respectively, between September 2018 and September 2019. Commercial credit growth stood at 8.1% y-o-y.

The latest edition of MSME Pulse includes a study on the changing profile of customer acquisition on MSME lending, using factors like vintage, CIBIL MSME Rank (CMR) distribution and the size of the borrowing entity.

According to TransUnion Cibil, CMR is a credit score for MSMEs pointing at early signs of risk, with values ranging from 1 to 10. Typically, MSMEs with CMR-1 to CMR-3 are considered lowest risk, CMR-4 to CMR-6 are considered medium risk and CMR-7 to CMR-10 are the highest risk, the credit information bureau said.

Further, the report said, the impact of change in a borrower’s profile is measured by a metric called ‘bad rate’ or the percentage of borrowers facing repayment stress and the loan turning non-performing within a year of sanction and renewal. The study showed that bad rate among MSME borrowers rose to 3.02% by the end of September 2019 from 2.94% a year-ago.

“Major factor contributing to this marginally higher bad rate is the increase in the share of lending towards lower vintages and high risk borrowers in Q2-FY19,” the report said.

It added that the bad rate of borrowers acquired in Q2 FY19 ranges from 0.4% for CMR-1 to 18.2% for CMR-10. The bad rate of borrowers acquired in Q2 FY18 ranges from 0.8% for CMR-1 to 17.8% for CMR-10. “Increased acquisition in highest risk segment contributes to higher bad rate for Q2-FY19 acquisitions,” it said.

The central bank has taken a few measures to provide relief to the MSME sector. In January 2019, the Reserve Bank of India (RBI) had allowed lenders to recast loans of stressed MSMEs, provided the total fund and non-fund based exposure to such a borrower did not exceed ₹25 crore. The central bank’s board on 19 November, 2018 had advised RBI to consider a scheme to recast loans of MSMEs, which have been hurt by the disruption caused by demonetization in late 2016 and the implementation of the goods and services tax (GST) in July the following year.

Moreover, in June last year, an RBI committee suggested a ₹5,000 crore stressed asset fund for domestic small businesses. The committee to study the problems faced by MSMEs was chaired by U.K. Sinha, former chairman of the Securities and Exchange Board of India. The committee said such a fund could work in tandem with RBI-mandated restructuring schemes or bank-led NPA revival solutions for MSMEs. The committee also suggested forming a government-sponsored Fund of Funds of ₹10,000 crore to support venture capital and private equity firms investing in MSMEs.“The decline in corporate NPAs has been supported by pace of resolution as well as write-offs by banks. We are yet to see any broad sectoral improvement which means that slippages could remain high. As India Ratings has pointed out in its FY20 outlook report published early last year, SMEs and retail credit will see increase in pressure as the economic slowdown persists,” said Prakash Agarwal, head of financial institutions at India Ratings and Research.

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