Bank credit growth to Micro, Small and Medium Enterprises (MSMEs) has decelerated on a year-on-year basis in the first three months of the current fiscal, according to Reserve Bank data.
Players in the MSME sector, the backbone of domestic industry and largest employer, said risk averseness makes banks reluctant to provide loans to small units, leading to a deceleration in bank credit growth. As per the latest Reserve Bank data, the credit to medium industries in June grew by 13.2 per cent (47.8 per cent last year) and micro and small industries by 13 per cent (29.2 per cent a year ago).

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In absolute terms, the gross bank credit outstanding to medium industries at June-end was Rs 2,63,440 crore compared to Rs 2,32,776 crore in June last year. In the case of micro and small industries, the credit outstanding in June was Rs 6,25,625 crore against Rs 5,53,675 crore in the corresponding month of 2022. In May, the credit to medium industries grew by 18.9 per cent (42.9 per cent last year) and micro and small industries by 9.5 per cent (32.7 per cent a year ago).

According to another set of RBI data for April, loan growth of medium industries was 19.1 per cent against 53.7 per cent last year. The growth in the case of micro and small industries was 9.7 per cent in April 2023 compared to 29.8 per cent in the year-ago month. FISME Secretary General Anil Bhardwaj said while the RBI data showed double-digit growth in bank credit to MSMEs, which might indicate a free flow of institutional finance to MSMEs, the fact remains that getting bank loans is an uphill task for individual MSMEs.

"The credit barriers for MSMEs are not limited by the processes and procedures. The real barrier is in the approach of the banking system, who consider any credit to MSME as a potentially bad loan and try to ring-fence the sanction procedure," he said. The Expert Committee on Micro, Small and Medium Enterprises, constituted by the Reserve Bank of India in December 2018, has estimated the overall credit gap in the MSME sector to be in the range of Rs 20 to Rs 25 lakh crore.

Puneet Kaura, Managing Director & CEO, Samtel Avionics -- an MSME that mainly manufactures products for the defence and railways sector -- said a concerted effort should be made by the government to prod the banks to provide adequate and timely credit to the MSME sector. "The ecosystem, which currently favours large borrowers, needs to change in preference of MSMEs that employ a large workforce and will also play a crucial role in the times to come to make the country a developed nation by 2047 as envisioned by Prime Minister Narendra Modi," he said.

 The gross non-performing advance of MSMEs stood at Rs 1,31,928 crore at March-end, down from Rs 1,54,094 crore a year ago and Rs 1,82,114 crore in March 2021.
Biz2Credit co-founder and CEO Rohit Arora said MSMEs in India are facing challenges in obtaining credit from banks and financial institutions due to factors like collateral requirements, limited credit history and high-interest rates.

Despite efforts to improve credit accessibility, there is still a need for further support and innovative solutions to address this credit gap for MSMEs, he added.
"There are concerns about banks being reluctant to provide credit to MSMEs due to factors, such as collateral requirements, the informal nature of businesses, lack of financial records, risk perception and high non-performing assets (NPAs) in the banking sector. These challenges have made it difficult for MSMEs to access loans," Arora said.

The government has taken several measures to improve credit flow to the MSME sector. With effect from April 1, 2023, the credit limit for Guarantee Coverage under Credit Guarantee Scheme for Micro & Small Enterprises has been enhanced from Rs 2 crore to Rs 5 crore and the annual guarantee fees have been reduced by 50 per cent. Also, under the Atmanirbhar Bharat packages, the government has announced a Fund of Funds to infuse Rs 50,000 crore equity in MSMEs, which have the potential and viability to grow.