Loan restructuring for small businesses welcome, but solve this malaise

Banks may have to tweak the way they appraise loans to the sector

The Reserve Bank of India’s (RBI) restructuring scheme for loans to micro, small and medium enterprises (MSME) loans up to Rs 25 crore has been hailed as a welcome breather, but a deeper malaise may be lurking.

A former chief executive of a state-run bank (and now a director on the board of a private bank) feels the stress is much higher than what has been reported. “It could be at 21-22 per cent of MSME loans. These levels will not be reflected in reported numbers due to restructuring. Had the debt recast not come through, MSMEs’ woes would have become a major issue at the time of elections.” For plenty of units still continue to reel under the adverse effects of demonetisation and the transition to Good and Services Tax (GST). “These twin shocks have either taken away business opportunities and delayed payments even as entrepreneurs spent more time figuring out compliance matters under new tax regime.” adds the banker.

For example, MUDRA loans, which are essentially loans to MSMEs backed by guarantees, are beginning to show signs of stress while seasoning is underway. The non-performing assets (NPA) under the scheme rose more than 20 times between 2015-16 and 2017-18. The total NPAs for loans extended under Pradhan Mantri Mudra Yojana (PMMY) rose to 

Rs  7,277 crore in FY18 from Rs  597 crore for FY16; the share of state-run banks in the bad loans were 3.43 per cent of the amount disbursed under the scheme, says data presented in Parliament.

The RBI in its recently released Financial Stability Report (FSR) points to continuing stress in the MSME sector where the NPAs for the micro segment (exposure less than Rs 1 crore) rose to 8.7 per cent in June 2018 from 7.9 per cent in March 2016 and that for the SME segment (exposure of between Rs 1-25 crore) increased to 11.5 per cent from 9.8 per cent during the same period. 

Some MSME borrowers’ attempt to access more than one loan within a short span; and this is increasingly becoming a headache for lenders. The default rates for these borrowers who take many loans from multiple lenders within 60 days have jumped to 4.4 per cent in September 2018 from 2.5 per cent in September 2015. Non-banking financial companies (NBFCs) are prone to becoming victims of loan stackers; 45 per cent of the sanctions by these firms shows loan stacking behaviour, says a just released CIBIL-SIDBI study.

The deeper malaise

RBI’s FSR points out that an analysis of MSME portfolios shows that the performance of state-run banks trails that of private banks and NBFCs. 
 

This is both in terms of inherent as well as realised credit risk underscoring the need to improve credit appraisal skills. What is also interesting is that despite the prompt corrective action (PCA) framework being in place, the relative share of banks under it increased in FY18 over FY17 – in absolute amounts, PCA banks incremental exposure to this segment increased by about 166 per cent to Rs 60,280 crore in FY18 from Rs 22,680 crore in FY17. 

Of course, the reason for this could be the fact exposures less than Rs 5 crore were not constrained by supervisory restrictions. 

The issue of restructuring MSMEs under stress was agreed upon at the November 19 board meeting of the RBI; board member S Gurumurthy has been a vocal supporter of a special scheme for MSMEs. 

The RBI had tweaked its norms for asset quality recognition right after demonitisation; and later, extended it following the GST roll-out in July 2017. The recent relaxation given to MSMEs by way of restructuring then brings into question whether such sharp increase in dud-loans to the sector is due to poor appraisal norms. 

This, in turn, is coming back to bite now, and the irony is that the FSR notes: “this may require examination of possible dilution of credit standards further and additions to supervisory strategy for banks under the PCA framework.”