In a positive development for the Indian banking sector, bad loans are expected to decline by 1 percentage point in the current financial year. However, a recent report by industry body Assocham and rating agency Crisil highlights the potential increase in defaults within the Micro, Small, and Medium Enterprises (MSME) sector, which was severely impacted by the pandemic. The report indicates that bad loans in the MSME sector could rise to double-digit levels. While overall gross non-performing assets (NPAs) are projected to drop below 4% by March 2024, it raises concerns about the challenges faced by MSMEs.
The report suggests that the improvement in bank loan books will continue for the third consecutive year, driven by the post-pandemic economic recovery and increased credit growth. Notably, the corporate sector is expected to make significant progress, with gross NPAs predicted to fall below 2% in the fiscal year. This represents a substantial improvement from the peak of approximately 16% recorded in March 2018. The study indicates that the quality of corporate assets has consistently improved, as evidenced by indicators such as the credit quality of bank exposures.
Assocham Secretary General, Deepak Sood, stated, “The twin balance sheet problem has been largely resolved, leading to a significant increase in credit growth. Our banking sector remains resilient.” This positive trend can be attributed to banks’ diligent efforts in cleaning up their balance sheets in recent years, as well as their reinforced risk management and underwriting practices. Banks have shown a preference for borrowers with stronger credit profiles, contributing to the overall improvement in asset quality.
However, the report raises concerns regarding the MSME segment. It projects that gross NPAs in the MSME sector will increase to 10-11% by March 2024, compared to approximately 9.3% as of March 2022. While relief measures implemented in the previous fiscal year mitigated the deterioration of asset quality to some extent, the MSME segment experienced a higher proportion of restructuring, accounting for around 6% compared to the banking sector’s overall figure of 2%. This indicates the challenges faced by MSMEs in recovering from the economic impact of the pandemic.
On the other hand, the retail segment has maintained a steady asset quality, with gross NPAs expected to remain at 1.8-2% over the medium term. This resilience can be attributed to the robust credit discipline observed by retail borrowers.
The anticipated decrease in overall non-performing loans in the banking sector is a positive sign, reflecting the ongoing recovery and improved financial health of businesses. However, the potential increase in MSME defaults warrants attention. The MSME sector plays a crucial role in India’s economy, contributing significantly to employment and growth. It is essential for banks and policymakers to address the specific challenges faced by MSMEs and provide targeted support to ensure their sustained recovery.
The report emphasizes the importance of maintaining effective risk management practices and promoting responsible lending. Banks need to closely monitor their exposure to the MSME sector and adopt measures to support viable businesses in distress. Timely intervention, proactive restructuring, and providing access to affordable credit can help MSMEs navigate through financial difficulties and prevent a further increase in defaults.
Given the vital role played by the MSME sector in India’s economy, it is imperative for banks and policymakers to address the specific challenges faced by these enterprises. Targeted support measures and policies should be implemented to ensure their sustained recovery. Timely intervention, proactive restructuring, and facilitating access to affordable credit can assist MSMEs in navigating financial difficulties and prevent a further increase in defaults.
Overall, while the banking sector shows promising signs of improvement and resilience, it is imperative to focus on the challenges faced by the MSME sector. By addressing these challenges and implementing targeted measures, the banking sector can contribute to the sustainable recovery and growth of the Indian economy.
