Credit to MSMEs fell after note ban: RBI study

MSME sector was worsened by demonetisation, announced on November 2016; while the introduction of GST has not made anyany substantial impact.
Image used for representational purpose only. (File photo | Reuters)
Image used for representational purpose only. (File photo | Reuters)

MUMBAI: The declining credit to the Micro, Small and Medium Enterprises (MSME) sector was further worsened by demonetisation, announced on November 2016; while the introduction of GST has not made any substantial impact on the overall credit of the sector, it has deeply dented their exports, an RBI study has shown.The report, Mint Street Memo, also reveals that the credit disbursal to the MSME sector has recovered a bit since the lows of 2017 and has reached that akin to the mid-2015. Though micro-credit, including loans by banks and non-banking financial companies to the sector, has grown in recent quarters, exports have been hit badly since the GST implementation, it said.

The MSME sector constitutes a vast network of over 63 million units and employs around 111 million people, contributing around 30 per cent to the GDP, accounting for about 45 per cent of manufacturing output and 40 per cent of total exports.“The MSME sector has witnessed two major recent shocks, demonetisation and introduction of goods and services tax.

For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after note-ban. Similarly, GST led to increase in compliance costs and other operating costs as most of MSMEs were brought into the tax net as over 60 per cent of them were not ready for the new tax regime,” said the report.Another report by Sidbi, notes that after note-ban and GST introduction, relative credit exposure initially declined for most MSMEs, but recovered by March 2018.

Dearth of timely funds a major hurdle
A major obstacle for growth of MSMEs is their inability to access timely and adequate finance as most of them are in niche segments where credit appraisal is a major challenge. 

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