The steady rise in loans given by commercial banks to micro, small and medium enterprises (MSME), turning into non-performing assets (NPA) has left officials worried as this is likely to negatively impact the India growth story, as the banks are now likely to exercise “extreme caution” while giving loans to MSMEs.

As per the latest Reserve Bank of India data, roughly 5% of the total loans given by commercial banks to the MSMEs were classified as NPA by March 2014 end. This rose to 6.32% in March 2015 and 8.32% of the total loans given to this sector had turned into NPAs by the end of March 2016.

“We are expecting that by the end of March next year, we will see this figure (percent of the total loans given in the financial year turning into NPAs) touching 10%. This is worrying as on one hand, we are expected to promote MSMEs, but we also cannot turn a blind eye to loans turning into NPAs. We have advised the banks to exercise more caution while giving loans to this sector and ‘go slow’, rather than becoming too liberal while advancing loans to this sector,” an RBI official said.

The MSME sector is considered important for the overall growth of the Indian economy because of the huge employment it generates especially in rural areas, the low use of capital and technology it requires and its focus on traditional skills and use of local resources.

According to an official with the MSME ministry, who is not authorised to speak to the media, the MSME sector provides employment to over 80 million persons and contributes about 8% to GDP, besides 45% to the total manufacturing output and 40% to the exports from the country. “However, when it comes to credit required by the MSMEs, we see a serious gap between the credit requirement and the credit finally given. Credit is a very crucial factor for the growth of the MSME sector, particularly the MSE sector, in view of its limited access to alternative sources of finance. With the rise in cases of units turning into NPAs, it is natural that the banks are going to exercise more caution while disbursing credit to the MSME sector, but in the larger interest of the economy, we expect the banks to be prepared to absorb the “hit” in terms of witnessing increased NPAs in the MSME sector,” he said.


Leave a Reply

Your email address will not be published. Required fields are marked *