Retailers now get MSME tag, but are banks ready to lend?
At least 2.5 crore traders are likely to benefit as the government announced the inclusion of retailers and wholesalers under the Micro, Small and Medium Enterprises category.
NEW DELHI: At least 2.5 crore traders are likely to benefit as the government announced the inclusion of retailers and wholesalers under the Micro, Small and Medium Enterprises (MSMEs) category.
This was a long-pending demand of retailers and traders’ associations to ensure Covid-hit businesses have access to finances from banks and financial institutions under priority sector lending. With the new tag, traders can also avail schemes announced by the government for MSMEs to stay afloat.
“The landmark decision will have a structural impact for the sector, helping it get formalised in the long-run rather than operate under the radar. In the immediate term, businesses up to Rs. 250 crore of turnover -- which is quite a bit -- will benefit in terms of getting the much-needed capital to survive, revive and thrive,” Kumar Rajagopalan, CEO of Retailers Association of India (RAI), said.
While June figures are yet to be released, a RAI survey showed that retail sales in May stood at only 21% of pre-pandemic level as stringent lockdowns in various states and dwindling consumer sentiment kept buyers away.
With consumption falling steadily since the last year following the Covid-led nationwide lockdowns in March 2020, retail businesses have been under tremendous financial strain on numerous fronts, including rentals, salaries, electricity charges, taxes and licence fees. The pandemic-induced disruptions have forced a number of small businesses to wind up with no access to credit at all, while those surviving are reviewing their overall financial stability under different scenarios and, if required, approaching lenders to refinance loans.
Apart from RAI, the Confederation of All India Traders (CAIT) had in March also demanded the restoration of MSME status for retail and wholesale trades which was taken away in 2017.
However, a mere change in the MSME definition doesn’t mean risk-averse banks will be willing to lend.
With the second wave of Covid-led disruptions across sectors impacting the repayment capacity of borrowers, MSMEs could turn out to be the next stress area for banks. Evidence came from none other than the central banks’ latest Financial Stability Report (FSR). The banking industry has cumulatively restructured loans worth Rs. 36,000 crore under the August 2020 Covid-19 loan restructuring scheme. "Despite restructuring, however, stress in the MSME portfolio of PSBs (public sector banks) remains high,” the Reserve Bank of India (RBI) said in its report. As of February 2021, 80% of the MSME borrowers moved into the high-risk category, according to the RBI data.
In absolute terms, the outstanding credit for MSMEs grew from Rs 11.8 lakh crore in May 2020 to Rs. 12.1 lakh crore in May 2021, whereas the incremental growth in this sector stood negative despite the government’s flagship Emergency Credit Line Guarantee Scheme (ECLGS).
RBI Governor Shaktikanta Das has warned banks on the risks arising out of loans to small businesses and directed them to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress.