Why lending to MSME makes sense

Context: The MSMEs’ lower resilience during the current crisis and Banks’ reluctance in giving loans to them are adding to its worries. This must be addressed as in times of recovery MSME’s will play a major role.

Present status of MSME

• Second-biggest employer in the country with a 31% share in India’s GDP.
• Bad loans in the segment have been on the rise over the past few years, but according to Cibil Study 74% of the close to 8.9 million units are creditworthy.
• Maharashtra has the maximum share of MSME credit followed by Tamil Nadu and Gujarat.
• Financing Source: banking system is the main source of money for the MSME segment, but microfinance institutions (MFIs) meet the credit needs.

Problems with MFIs:

• MFI’s are not suffering from risk aversion but do not have money to lend. NBFCs and MFIs borrow primarily from banks.
• Turnaround time for the subscriber of these kind of loans is small (for vegetable vendor etc cash flows from day one, hence they need fresh loans regularly).
• MFI loans are distributed to semi-urban -50%, rural -40% and 10%-urban, magnifying the effect of pandemic in urban areas.

Way forward:

• The Small Industries Development Bank of India (SIDBI) and Micro Units Development and Refinance Agency (MUDRA) Ltd can be more liberal in its exposure to MSME’s

• We may see a rural-urban divide with the urban pockets affected more by Covid-19 but the MFI business model should encourage banks to handhold them in this hour of crisis.