Credit offtake to MSMEs accelerates

by Mahesh Vyas

Offtake of credit from scheduled commercial banks to medium, micro and small industrial enterprises has zoomed in recent months. The take-off is sudden and it is relatively big. The offtake by these enterprises is not large enough to make any significant impact on the overall outstanding credit, but the sudden and sustained increase in credit deployment in these enterprises in recent months is noteworthy because it is peculiar.

It is not entirely clear if the sudden increase in lending to these smaller enterprises is the result of bank loans becoming available on easy terms and being marketed aggressively by the government and public sector banks or whether there is a genuine extraordinary increase in credit from medium, micro and small enterprises. The former would be inconsequential but the latter merits attention.

Loans from scheduled commercial banks that account for about 90 per cent of lending by all scheduled commercial banks show a sharp increase in loans outstanding against medium-sized industrial enterprises since June 2021 and against micro and small industrial enterprises since May 2021.

Outstanding loans of scheduled commercial banks to medium-sized enterprises were around Rs.1 trillion for three years till August 2020. Then, they quickly rose to Rs.1.2 trillion by October 2020 and then further to Rs.1.4 trillion by April 2021. Credit jumped in July 2021 to Rs.1.6 trillion and then to Rs.1.8 trillion by October 2021. The average monthly outstanding SCB credit to medium-sized industrial enterprises during April-November 2021 is 43 per cent higher than it was in 2020-21. This is an extraordinary increase in loans outstanding to medium-sized industrial enterprises for two reasons. First, the overall growth in credit has been modest at only around eight per cent in a similar comparison. In comparison to this overall trend, the sudden spike in growth in loans to medium-sized industrial units is extraordinary. Secondly, prior to this sudden increase, loans outstanding against these enterprises had remained stagnant for over three years. The sudden spurt therefore is extraordinary, again.

SCB loans outstanding against micro and small enterprises have risen similarly suddenly and sharply. The monthly trend shifted from May 2021 to a much steeply rising gradient compared to what was observed in the preceding three years. Micro and small enterprises were extended additional loans of Rs.268 billion between March 2021 and November 2021. In a similar period in each of the preceding five years, outstanding loans to this sector had declined and not increased. 2021-22 is the first year in the last five years in which loans to these small enterprises have been rising steadily compared to the outstanding loans at the beginning of the fiscal year. This is extraordinary.

What could have caused this sudden and sharp increase in loans to medium and small industrial enterprises? Large industrial enterprises have not seen any uptick in credit offtake in 2021-22. Outstanding loans to them as of November 2021 at Rs.22.7 trillion was lower than it was at Rs.23.8 trillion as of March 2021. A small increase in outstanding loans to large industrial enterprises is seen in October and November, but these still leave them lower than the levels at the beginning of the year. The fall in loans to large enterprises squares with the low interest in investments and access to primary capital markets. Net fixed assets of listed manufacturing companies as of September 30, 2021 were a meagre 4.2 per cent higher than as of September 30, 2020.

Enterprises engaged in services industries like transport operators, hotels and tourism, software, trade, non-banking financial services, real estate, etc. have not seen any pick-up in bank loans. Outstanding loans to services enterprises declined by Rs.208 billion between March and November 2021.

The only set of enterprises to see an increase in bank loans is medium, micro and small enterprises. These enterprises have benefited from the central government’s Emergency Credit Line Guarantee Scheme (ECLGS). The scheme was launched in March 2020 with limited applicability. The scope of the scheme was enhanced in November 2020, March 2021 and May 2021 and Rs.2.9 trillion was sanctioned under the scheme till November 2021.

According to data released by RBI, the net increase in outstanding bank lending to medium, micro and small enterprises between April 2020 and November 2021 was Rs.1.37 trillion. This increase is largely, or possibly almost entirely, because of the ECLGS. ECLGS loans are top-up loans to help existing business enterprises overcome their difficulties arising out of lockdowns and other pandemic related ill-effects.

A study by TransUnion CIBIL (ECLGS Insights Report, December 2021) shows that 45 per cent of the ECLGS loans were used to clear vendors and 13 per cent for paying salaries and 29 per cent to restart operations. This study is for loans taken till the period ending March 2021. It seems that the ECLGS was effective in arresting any major financial stress in the operations of the MSME sector. But, what explains the sharp pick-up in loans to the medium, micro and small enterprise in 2021-22. ECLGS loans are 100 per cent guaranteed by the central government and there is no processing fee. If these easy loans are to continue to fix financial stress then, the problems of the MSME sector may have just ballooned in 2021-22. If not, then there is a genuine increase in demand for funds from the smaller enterprises in 2021-22.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.1 +1.9
Consumer Sentiments Index
Base September-December 2015
59.0 0.0
Consumer Expectations Index
Base September-December 2015
60.4 0.0
Current Economic Conditions Index
Base September-December 2015
57.0 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Mar 21 Jun 21 Sep 21 Dec 21
New projects 2.36 2.74 2.25 2.51
Completed projects 1.17 0.74 1.18 1.52
Stalled projects 0.28 0.33 0.03 0.03
Revived projects 0.23 0.12 0.28 0.39
Implementation stalled projects 0.34 0.38 0.25 0.66
Updated on: 18 Jan 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 21 Jun 21 Sep 21 Dec 21
All listed Companies
 Income 15.1 39.2 27.9 15.7
 Expenses 7.4 38.6 27.3 17.2
 Net profit 337.8 142.5 52.6 9.3
 PAT margin (%) 8.8 9.0 9.6 19.5
 Count of Cos. 4,401 4,495 4,545 122
Non-financial Companies
 Income 17.8 56.1 36.1 18.0
 Expenses 10.7 57.1 36.6 21.6
 Net profit 222.4 199.3 59.5 3.5
 PAT margin (%) 9.0 8.5 8.8 18.2
 Net fixed assets 2.3 4.9
 Current assets 4.3 11.0
 Current liabilities 1.2 0.9
 Borrowings -4.5 12.2
 Reserves & surplus 11.7 12.4
 Count of Cos. 3,247 3,301 3,304 89
Numbers are net of P&E
Updated on: 18 Jan 2022 8:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.4 0.6 -1.5
 Expenses 13.8 0.4 -4.1
 Net profit 12.7 -6.9 62.0
 PAT margin (%) 2.0 2.1 5.7
 Assets 9.9 8.8 10.7
 Net worth 8.2 4.5 13.3
 RONW (%) 3.6 3.5 8.2
 Count of Cos. 32,530 31,471 11,634
Non-financial Companies
 Income 14.2 -1.2 -3.0
 Expenses 14.3 -0.9 -5.3
 Net profit 22.1 -21.1 49.3
 PAT margin (%) 2.8 2.3 5.3
 Net fixed assets 6.0 11.2 1.5
 Net worth 7.8 2.2 11.0
 RONW (%) 6.3 4.9 9.1
 Debt / Equity (times) 1.0 1.1 0.8
 Interest cover (times) 2.2 1.9 2.8
 Net working capital cycle (days) 74 81 80
 Count of Cos. 25,943 25,015 8,657
Numbers are net of P&E
Updated on: 18 Jan 2022 2:48PM