MSME Credit conundrum

First thought this morning

Surprisingly, the mainstream media, especially business media, has started discussing the Union Budget for FY20. Traditionally, the outgoing governments have usually refrained from presenting a full budget during the election years. The idea behind this practice is to maintain a semblance of ethics in politics. The incumbent government is mandated to rule for only five years (in the current case May 2014 to April 2019). Ethically, it should not commit the next government to any policy measure, which is not urgent and related to national security or international relations.
No matter how confident the incumbent regime is about its victory in the forthcoming elections, it should refrain from breaking this set tradition for whatever reason. And there is absolutely no reason to believe that the incumbent government is going to break this tradition when the finance minister rises to seek the vote on account and approvals for demand for grants on 1 February 2019.
The media conjecturing therefore sounds mostly undesirable and speculative.
However, in case the government does decide to break the tradition and present a full budget for the next year, it would be interesting to see whether the Finance Minister will have the courage to raise taxes to meet the tighter fiscal targets for FY20, or he will loosen the purse strings keeping the elections in sights, and thus squandering the four years of painful fiscal consolidation.
Chart of the day

MSME Credit conundrum

Recently, RBI raised concerns over deterioration in the asset quality of loans given to marginal and small entrepreneurs under the PM MUDRA Yojna (PMMY).
As per media reports (for example see here), RBI has cautioned the finance ministry that the scheme might turn-out to be the next big source of NPAs, which have plagued the banking system for past many years. As per RBI bad loans under PMMY have already risen to Rs 11,000 crore.
As per the annual report of PMMY, 2017-18, total disbursements under the scheme stood at Rs 2.46 trillion in FY 18. Out of this, 40 per cent were disbursed to women entrepreneurs and 33 per cent to social category.
Interestingly, the observations of banking regulator come at a time, when it has formed an expert committee to—
(a)   Review the current institutional framework in place to support the MSME sector;
(b)   Study the impact of the recent economic reforms on the sector and identify the structural problems affecting its growth;
(c)    Examine the factors affecting the timely and adequate availability of finance to the sector;
(d)   Study the global best practices with respect to MSMEs and recommend its adoption in India, wherever appropriate;
(e)    Review the existing MSME focused policies and its impact on the sector;
(f)    Propose measures for leveraging technology in accelerating growth of the sector; and
(g)    Suggest long-term solutions for the economic and financial sustainability of the MSME sector in India.
While expressing concerns about the deteriorating health of loans to MSME sector, RBI has recently taken steps to facilitate meaningful restructuring of MSME accounts that have become stressed. Under the latest scheme, RBI has decided to permit a one-time restructuring of existing loans to MSMEs that are in default but ‘standard’ as on January 1, 2019, without an asset classification downgrade.
All accounts with a gross exposure upto Rs25crores as on 1 Januatry 2019 are eligible for the scheme. The restructuring is to be implemented by March 31, 2020. The banks have been directed to make a provision of 5% in addition to the provisions already held, in respect of accounts restructured under this scheme.
Prima facie, there appears to be some incongruence in the RBI’s recent words and actions in respect of overall MSME loans. It is distinctly possible that RBI has taken some decision that may not be prudent purely from the regulatory viewpoint. These might have been taken to suit the political expediency of the government.
In this context, it is pertinent to take note of December 2018 report of CRISIL titled MSME Pulse. The report highlights a number of interesting data points.
The most disturbing data point for me is that the industry NIMs for MSME credit range between 4-7%. Given that this segment has historically had a lower credit cost (ranging between 1-2%), the pricing of loans to MSME seems exorbitant and unsustainable. The question is how the balance will get restored? Will credit cost rise or the NIMs come down? We would know this in couple of years.

Author: Midas Finserve

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