MSME loans: Government could form task force to monitor stress as NPA risk is high


  • Joint CEEW and NIPFP report says there is a high risk that a significant proportion of loans under the Rs 3 lakh crore emergency credit program will turn into NPA
  • Put in place a monitoring mechanism to monitor loan account strains on a monthly basis, the report suggests.
  • Many banks insist that MSMEs provide trade projections for the next 2-3 years to ensure they repay loans on schedule
  • The report says it will enable lenders and the Center to take timely corrective action by providing visibility into the gradual build-up of the NPA
  • The MSME sector accounts for 90% of industrial units in India and contributes 45% of total industrial value added.

Even though banks are providing emergency credit as part of the government’s plan to offer loans worth Rs 3 lakh crore to MSMEs (Ministry of Micro, Small and Medium Enterprises) to overcome the coronavirus crisis, the alarm bells started ringing on part of it turning into non-productive assets (NPA).

A joint report by the Energy, Environment and Water Council (CEEW) and the National Institute of Finance and Public Policy (NIPFP) indicated that there is a high risk that a proportion Significant of these loans turns into NPA and suggested setting up a monitoring mechanism to track stress in loan accounts on a monthly basis.

“There is a high risk that a significant proportion of these loans will turn into NPA, which would reaffirm the lack of creditworthiness of MSMEs. The government should mandate lenders to introduce a mechanism for monthly monitoring of the use of funds and the financial health of borrowers, and to intervene at the first signs of distress, “the report said.

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Unsurprisingly, many banks insist that MSMEs provide trade projections for the next 2-3 years to ensure that they repay loans on schedule. Annoyed by this, many MSMEs complained about the additional paperwork. Notably, Finance Minister Nirmala Sitharaman announced last month an automatic and unsecured emergency line of credit of Rs 3-lakh crore to the MSME sector.

The emergency credit program covers existing borrowers with an outstanding credit limit of up to Rs 25 crore as of February 29, 2020 and having a turnover of up to Rs 100 crore. Borrowers are entitled to up to 20 percent of all of their outstanding loans in the form of an emergency line of credit. The ceiling on interest rates charged by banks and financial institutions was capped at 9.25 percent.

For NBFCs, the upper limit is 14%. Up to 45 million MSMEs are expected to benefit from the concessional loan program. “To encourage lenders, the government has provided a full credit guarantee on this amount. While this will provide short-term liquidity, it is a huge strain on public funds and does not address MSMEs creditworthiness. “, said the report titled” Jobs, Growth and Sustainability: A New Social Contract for India’s Recovery “.

Suggesting that the proposed monitoring mechanism will provide visibility into the gradual build-up of the NPA, the report says it will also allow lenders and the government to take corrective action in a timely manner. “In addition, now is the opportune time to institute formal monitoring of MSME financing as a business practice and integrate them as part of basic banking activities,” he said.

Also read: 100% Credit Guarantee for MSMEs: Banks See Red Flags in Small Print

It was proposed that the Ministry of MSMEs and the Ministry of Finance form a joint working group to assess this mechanism as a pilot, and possibly institutionalize it for the MSME sector. “This is a compliance measure and has no direct impact on employment. However, improving the solvency of MSMEs will benefit millions of workers employed in this sector,” noted the report, which was launched by Minister of MSMEs and Road Transport and Highways Nitin Gadkari. .

The MSME sector accounts for 90 percent of India’s industrial units and contributes 45 percent of total industrial value added. India’s 45 crore of informal workers make up 90 percent of its total workforce, with 50 lakh to 1 crore of workers added each year. About 40 percent of these workers are employed by MSMEs.