“There have been several instances of promoters of these smaller companies trying to leverage more than what was on the block to get quick access to working capital. Banks are now becoming more prudent while lending to them.”The shrinking credit pie comes even after finance minister Nirmala Sitharaman made revival of MSMEs a priority in recent policies. The sector’s contribution to GDP is estimated to be 30% and these small businesses are instrumental in generating employment.Throughout last year, the government instructed banks to disburse working capital loans to these businesses through new schemes and channels such as festive season loan melas, the PSB59 loan portal and older ones including Pradhan Mantri MUDRA Yojana and TREDS-based bill discounting platforms.“Banks lend with the concept of risk returns. If a particular credit is not commercially viable, then banks won’t disburse it despite the broader directions they may have been given,” said Prakash Agarwal, head of banking and financial ratings at India Ratings.“With risk aversion being the new guiding principle of the Indian banking industry, banks have started to reduce working capital limits, increase risk premium — thereby charging effective interest of over 16% — and insist on additional security when these SMEs are not even generating positive Ebitda,” said Sridhar Ramachandran, CIO of IndiaNivesh Renaissance Fund. “Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through the lifecycle much more closely.”The Micro Units Development & Refinance Agency Ltd (MUDRA) was set up by the government to develop and refinance micro-enterprises by supporting finance institutions that lend to such businesses engaged in manufacturing, trading and service activities.

Source: Economic Times January 02, 2020 03:33 UTC