Finance Minister Jaitley with bankers at the World Congress of Savings and Retail Banks in New Delhi, Thursday. Tashi Tobgyal Finance Minister Jaitley with bankers at the World Congress of Savings and Retail Banks in New Delhi, Thursday. Tashi Tobgyal

While the Reserve Bank of India said two weeks ago that there is no sign of a liquidity crunch, its own latest data shows that banks’ credit outstanding to the Micro, Small and Medium Enterprises (MSMEs) sector has seen a contraction for the first time in 14 months in September 2018. This is the month IL&FS began defaulting on its outstanding dues. According to RBI data released Wednesday, while the overall bank credit outstanding and that to the industry segment grew by 11.3 per cent and 2.3 per cent respectively in September 2018 (over September 2017), the credit outstanding to the MSME sector — which accounts for about 45 per cent of manufacturing output in the country and nearly 40 per cent of the total exports — contracted by 1.4 per cent during the month.

If the MSME sector were to be excluded, then within the industry segment, the situation was better for medium and large scale industries, which saw credit outstanding expand by 3.3 and 2.9 per cent respectively. The 1.4 per cent contraction witnessed by the MSME sector in September 2018 is the sharpest since February 2017 when the sector was continuing to reel under impact of demonetisation. In February 2017, the credit outstanding for the MSME had contracted 5.2 per cent over the same period previous year.

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Economists say that the data reflects the fact that the MSME sector is facing constraints in availability of credit. “There is weakness in flow of credit to the MSME sector, they are finding it tough to raise funds. Even the government is trying to push liquidity for MSME players and that shows that there is some recognition of the fact that there are some issues,” said D K Joshi, chief economist at Crisil.

Experts say the September data does show a shift towards tightening credit situation for the MSMEs and the contraction figure may broaden when data is available for October and November 2018.

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On October 30, at the meeting of the Financial Stability and Development Council chaired by the Finance Minister and attended by the RBI Governor Urjit Patel among others, the central bank is learnt to have downplayed the issue of liquidity crunch.

Sources said that during the FSDC meeting, when the government highlighted concerns that the persisting liquidity shortage in non-banking financial companies (NBFC) should not spiral into other parts of the economy, the RBI pointed out that since the economy was experiencing healthy credit growth, there is no sign of a liquidity crunch and the central bank is watchful.

However, over the last two weeks, both the government and the RBI have been in discussions to ease credit flow to MSMEs and the government is learnt to have asked the RBI to ease the Prompt Corrective Action norms. While a relaxation in PCA norms will help state-owned banks kick-start lending to MSMEs, specific relaxation in RBI regulations are also being reworked to provide some breathing space to smaller companies.

It is learnt that the Finance Ministry has impressed upon the RBI to relax certain “risk-weight” norms for lending to MSMEs and align these norms to globally accepted rules for smaller companies in a bid to enhance bank lending to MSMEs.

Risk weight is capital required to be set aside by banks or housing finance companies while giving loans. With 11 of the total 21 public sector banks under the Prompt Corrective Action (PCA) framework of the RBI, MSMEs have been finding it difficult to raise credit in a smooth manner to conduct their business.

Another area where some consensus is likely to emerge is to extend the classification criteria for loans to MSMEs as a standard asset. The central bank had in June allowed banks and NBFCs to classify their dues from all MSMEs, which are pending for up to 180 days, as a “standard” asset in their books, subject to certain conditions. This relaxation expires January 1, 2019 and banks are to revert to 90-day norm, in a staggered manner, for classification of loans to MSMEs as standard assets.

As per the classification of Ministry of Micro, Small and Medium Enterprises, for manufacturing sector, a micro enterprise is one where investment in plant and machinery does not exceed Rs 25 lakh; a small enterprise is one where such investment is more than Rs 25 lakh but does not exceed Rs 5 crore; and entities with investment in the range of Rs 5 crore and Rs 10 crore in plant and machinery are medium enterprises.

For entities in the services sector, a micro enterprise is one where investment in equipment does not exceed Rs 10 lakh; those with investment between Rs 10 lakh and Rs 2 crore are classified as small enterprises and ones with investment between Rs 2 crore and Rs 5 crore are classified as medium enterprises.

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