Credit growth in MSME segment faces severe contraction despite ‘Emergency Credit Line Guarantee Scheme’

As the banks are cherry-picking their credit portfolios with caution, and with economic activities remaining subdued, the overall bank credit is expected to remain slower in the near term.

Even as the Modi government introduces the Emergency Credit Line Guarantee Scheme (ECLGS) for liquidity support to MSMEs, there is a major contraction in credit offtake in the MSME segment. While the credit growth in other sectors such as agriculture, services, and personal loans were slow yet positive, the credit offtake in the MSME sector saw a severe on-year contraction of 12.7 per cent in June 2020, according to a report by Care Ratings. As the banks are cherry-picking their credit portfolios with caution, and with economic activities remaining subdued, the overall bank credit is expected to remain slower in the near term, the report added.

Credit growth remained low despite the availability of ample liquidity with banks. Last week, Finance Minister Nirmala Sitharaman had said that banks cannot refuse credit to MSMEs covered under the emergency credit facility. Speaking at FICCI’s National Executive Committee Meeting, she had added that if the banks refuse such credit, it must be reported and she will look into it.

In the same week, Prime Minister Narendra Modi had also interacted with the representatives of banks and NBFCs, where he asked the banks to not treat all credit proposals with the same yardstick and ensure that the borrowers get access to funding on their merit and do not suffer in the name of past NPAs. PM Modi had urged banks to motivate small entrepreneurs, self-help groups, and farmers to use institutional credit to meet their credit needs and grow.

Meanwhile, amid the need to give credit to the companies, the banks also have to keepo their loan books clean. July’s Finacial Stability Report showed that the gross NPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. It also said that if the economic woes deepen, the ratio may further escalate to 14.7 per cent under the very severely stressed scenario.