Many MSMEs operate in the informal space, which makes it difficult to asses their creditworthiness | Photo Credit: PICHUMANI K

Indicating a positive trend, loans to the Micro, Small and Medium Enterprises (MSMEs) have showed an uptick on a year-on-year basis so far in the current fiscal, compared to the corresponding period last fiscal. According to the latest Reserve Bank of India (RBI) data, advances to micro and small enterprises registered 13.3 per cent year-on-year growth, while that for medium enterprises stood at 17.2 per cent. 

During the financial year 2023-24, there was a slowdown in the growth of loans for micro-small and medium enterprises at, logging 10.2 per cent and 9.7 per cent respectively, compared to 28.3 per cent and 36.8 per cent growth, respectively, in 2022-23.

Digitalisation

The increase, though considerably lower than the growth registered in FY23, came on the back of measures and a renewed focus on MSME credit. The credit flow is expected to improve going forward. 

“The deepening of the Account Aggregator (AA) framework will enable MSMEs to access cash flow-based financing from lenders with minimal documentation,’‘ Bibekananda Panda, Senior Economist, State Bank of India (SBI) told businessline.

Additionally, the launch of the RBI’s frictionless end-to-end digital platform, Unified Lending Interface (ULI), will revolutionise access to credit, especially for small MSMEs, he added. 

“The formalisation and digitalisation of the economy have enabled banks to reach out to small MSMEs. While credit availability will not be a concern going forward, MSMEs need to focus on credit absorption,’‘ the SBI economist said. 

Schemes to boost growth

The initiatives proposed in Budget 2024 will give fillip to the sector’s sustainability and growth. These include the CGTMSE scheme offering collateral-free loans, changes in asset-recognition norms for banks to support MSMEs under distress, ensuring their financial stability and operational continuity, among others. 

“We are hopeful that the overall credit growth will reach the high level registered in FY23 and we are taking a slew of measures,’‘ said a senior official of Canara Bank. 

The moderation of credit compared to FY23 was on account of various factors. It can be attributed to to a high base and a general slowdown in overall credit growth within the economy, say experts. 

Assessing creditworthiness

According to J Swaminathan, Deputy Governor, RBI, credit is crucial for the growth of MSMEs, and affordable funds can boost their competitiveness. 

“Banks often use asset-based lending, which relies on collateral rather than cash flow. However, many MSMEs lack adequate assets for collateralisation, particularly for working capital needs, often leaving smaller businesses excluded from funding opportunities from the formal banking sector,’‘ he said in a recent speech. 

Further, as many MSMEs operate in the informal space, assessing their creditworthiness can be difficult due to information asymmetry, particularly with respect to the financial performance of their businesses, he added. 

The next six months of the current fiscal will show if this uptick was just a green shoot or will be a sustained trend throughout the financial year. 

Published on September 25, 2024