Small businesses facing financial crunch as banks become wary of lending

Present status of NBFC in India

Small businesses are facing financial crunch as banks and non-banking financial companies are becoming wary of lending to them amid slowing consumption, weak economy and likelihood of rising bad loans.
According to a data released by the Reserve Bank of India (RBI), gross loans extended to the medium, small and micro enterprises (MSME) fell 3.43% to Rs 4.65 lakh crore in November from Rs 4.81 lakh crore in March.

The data suggests that the loans to micro and small businesses contracted by 3.4% since the beginning of 2019-20 (April-March)as against 2.7% during the same period in the last fiscal year. Meanwhile, for medium-sized firms lending tapered 3.6% as against growth of 1.4% between March and November 2018.

The performance of MSMEs is critical to India’s aspirations to become a USD 5 trillion economy in next 4-5 years, though it looks like a daunting task considering the current state of economy. MSMEs contribute roughly over 35% to country’s gross domestic product (GDP) and over 40% of the exports.

The overall lending to industries slowed to 2.4% in November as against 4% during a year ago period according to a media report. The priority sector lending grew at 3.5%, down from 8.4% in the corresponding periods, the report further suggests.

Credit to agriculture & allied activities slowed down to 6.5% in November 2019 from 7.7% in November 2018.
The services sector too have bear the brunt. According to a Financial Times report, the overall lending to the services sector saw a measly growth of 4.8% during the November month as against 28.1% in the corresponding period during financial year 2018-19. It had to do with the banks cutting lending to non-banking institutions. The on-year disbursal growth in November to NBFCs decelerated to 29% against 57% during the corresponding periods in FY20 and FY19.
The report had quoted RBI’s data for November month on sectoral deployment of bank credit collected from select 39 scheduled commercial banks which account for about 90% per cent of the total non-food credit.
It started becoming evident in September, when the bank credit growth slowed to 7.3% y-o-y from 24% a year ago. The non-food credit growth came in at 7.2% as on November 22, compared to 13.8% a year ago.
Loan growth to professional services grew at a meagre 1.3% against 24.5% a year ago, while bank credit to computer software services declined by 0.4%, against a growth of 13% a year ago.

The working capital loans to small businesses have come down significantly, with risk premiums going north. The banks are not putting their money in companies that are not investment grade.

The situation has aggravated all the more as the banks have become wary of lending to the NBFCs post IL&FS and Deewan Housing Finance Ltd’s(DHFL)debacle. The bank advancements of credit to NBFCs fell to Rs 1.9 lakh crore at the end of September from Rs 2.9 lakh crore during the same period last year, another report said quoting CRIF High Mark credit bureau.

The median rated mid-sized NBFCs rely for more than 80% of their debt on state-run banks.
Risk Aversion
The credit squeeze could be attributed to multiple factors showing-up concurrently.

One of the reasons is the likelihood of bank defaults, especially in the event of MUDRA loans. The banking regulator has warned banks against the mounting bad loans under the government’s flagship scheme, directing them to focus on the repayment capacity of beneficiaries while disbursing loans.

Government set-up the Micro Units Development & Refinance Agency Ltd (MUDRA) to develop and refinance micro-enterprises by supporting financial institutions that lend to such businesses.

The RBI data suggests that outstanding loans to the services sector alone stood at Rs 23.6 lakh crore as on November 22, up from Rs 2.25 lakh crore during the corresponding period in FY19.

The banks’ provisioning for bad loans is expected to remain high.

The situation is such that the RBI and India’s largest public sector bank – the State Bank of India (SBI) had to issue a statement that the credit to NBFCs would not be stopped.

Even in my previous blogs, I had pointed how worrisome is the situation for economy with back to back quarters of just 5% and 4.5% growth reported during the June and September quarters. The December quarter is not likely to be much different as has been widely reported in sections of media. The worst part is that the growth deceleration has not settled yet.

Consumption across sectors has been abysmally low because people either are not confident about the growth in near to medium term and want to save for bad times or do not have enough money to spend on things that they would have otherwise spent on. Even expenditure on necessities have been cut down by households.

Unemployment is at an all-time high with over 9 million job losses since the NDA government took over as per the National Sample Survey Organisation (NSSO) data which was later withdrawn by the government on technical grounds.

The informal sector has fared even worse with the government deciding to demonetise high denomination notes. The rural economy is the major driver of the economic growth in the country.

The budget is less than two months away and all eyes are on the Finance Minister Nirmala Sitharaman on how she would handle multiple problems with regards to economy and its revival in the next year budget.

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