Banks have been lending to MSMEs but only certain large companies in the MSME sector make the cut and these typically are those who do not do only-cash sales. One will have to wait and see whether this changes

The Rs 2.11 lakh crore capital infusion in public sector banks (PSBs), announced by the Narendra Modi-government recently, will enable banks to resume lending to micro, small and medium enterprises (MSMEs), said industry experts and bankers. On 24 October 2017 the government unveiled an unprecedented Rs 2.11 lakh crore capital infusion for state-run lenders that includes a mix of re-capitalisation bonds, budgetary support, and equity dilution. The modalities of the recapitalisation bonds are yet to be worked out.

MSMEs have been struggling for capital, particularly in recent years. This scenario worsened post-demonetisation and the introduction of goods and services tax (GST) as small traders were severely hit by cash crunch and uncertainty on tax rules.

According to the Reserve Bank of India (RBI) data, bank lending to small and medium companies have either remained flat or shrank in the last few years. As on September 2017, bank credit to micro and small companies is at Rs 3.69 lakh crore, largely same as the figures in the previous two years. Credit offtake of medium-sized companies has shrunk to Rs 1.01 lakh crore.

With the induction of capital, there could be a definite boost to credit to this sector, say experts. “Many banks have been unable to lend to this sector because of capital constraints and large non-performing assets (NPAs). Also, MSMEs haven’t been doing too well themselves and post-demonetisation and GST, their performance hasn’t been promising,” says Jayanta Sinha, independent banking consultant and former chief general manager, State Bank of India.

The government's move will give a boost to the MSME sector and its activity, said Avinash K Dalal (Nallawala), founder and national president of All India MSME Association. “Inspite of RBI directives, PSU banks spread red carpet for corporates. Their treatment of the MSME sector is step-motherly. The announcement by Jaitley will give a boost to employment, exports and also the GDP of the country,” he said.

Dalal pointed out that NPAs from the MSME sector would be much smaller than those in the corporate sector. The sector has been boosted by a number of schemes offered by the MSME Ministry, National Small Industries Corporation and Mudra Bank, he pointed out.

Banks have been lending to MSMEs but only certain large companies in the MSME sector make the cut and these typically are those who do not do only-cash sales. Besides, these companies also maintain accounts and are successful in securing loans.

MSMEs are referred to as ‘unorganised’ only when the sector is bundled with small SMEs like shopkeepers, etc. “One of the challenges has been that a number of companies that have become non-performing assets have been from this sector. Many small banks are struggling with capital adequacy issues and are thus unable to lend,” said R K Bansal, former executive director of IDBI Bank.

With banks not being very forthcoming so far to lend to the MSME sector, fintech companies have been reaping rewards. Cash Suvidha, an online fintech platform that claims to offer business loans in three days, says that banks ask for credit score and Cibil report which many in this sector are unable to comply.

“We disburse loans now in 48 hours from 3 days earlier at 19 percent to 24 percent on reducing balance EMIs. We do it based on our logarithms of human behavior, social quotient of the borrower, etc,” says Rajesh Gupta, founder, Cash Suvidha. It disburses ticket sizes in the range of Rs 20,000 to Rs 5 lakhs. “We have a target of disbursing Rs 100 crore by the end of financial year 2018 and have disbursed approximately Rs 54 crore so far," he said.

Welcoming the government's decision to boost the MSME sector, some still doubted the ability of the banks to disburse money to the sector. Anil Kothuri, president - head retail finance, Edelweisss, said though the bank recapitalisaion will ensure that banks are adequately provided for without dipping into their current capital. A little more money to the sector will help, he said, adding that however, there is a gap between ability and the unwillingness to lend.

"Large corporates find it easy to get loans and so do individuals from banks. But SMEs are not able to get loans and continue to be underserved as there is no standard procedure across banks unlike in the NBFCs and private banks. Private sector banks and NBFCS are able to help the sector by aggregating ways of underwriting customers. Standardisation leads thus to scale. All said and done PSU has the bulk of distribution unlike NBFCs and private banks."