Page 41 - Banking Finance November 2020

ARTICLE

organized and formalized book keeping systems. This
effectively results in enterprises qualifying for much smaller
than what is needed.

Inadequate collateral - Micro and early- stage small
enterprises typically do not have adequate access to
immovable collateral that meets the criteria of financial
institutions. This increases the credit risk perception of
MSMEs. While banks and most NBFCs continue to insist on
collateral requirement, MSMEs overwhelmingly prefer a
loan option that does not require collateral when given the
choice.

Limited equity base - On account of their inadequate equity Rising Stress/NPA Ratios across MSE and Overall Portfolios
base, MSMEs often take loans from multiple lenders, of SCBs - According to data from TransUnion CIBIL, NPA
overextending themselves financially and making them rates across the MSME sector spiked in the quarter ending
vulnerable to defaulting. Additionally, these enterprises also June 2019. Among firms with credit exposure of less than a
access credit from informal sources, which are not reported crore, the NPA rate jumped to 8.7% from 8.1% in the
to credit bureaus. Hence, financial institutions continue to previous quarter. The NPA problem, though, increases with
err on the side of caution and are discouraged from providing the size of the loan disbursed. Firms in the bigger credit
debt finance to MSMEs. exposure segment (exceeding Rs. 25 crore) have NPA rates
of around 18%. Though private sector banks and non-
Competition from multinational companies - In present banking financial companies (NBFCs) increasingly account for
era of globalization, the MSME`S are facing the great a greater share of the credit to MSMEs, the biggest formal
competition from the international manufacturing credit source for MSMEs remain public sector banks (PSBs).
companies who are providing quality goods at cheapest
price. Therefore, it is very difficult to compete with the As of June 2019, nearly half of all credit disbursed to MSMEs
multinational companies. came from PSBs and these are the banks most vulnerable
to MSME-related NPAs. In the June 2019 quarter, 16% of
Poor infrastructure - Though, MSME`S are developing so all PSB MSME credit was NPAs (up from 14.5% in the same
rapidly but their infrastructure is very poor. With poor quarter in June 2017) nearly three times the rates in private
infrastructure, their production capacity is very low while banks and NBFCs. Within MSMEs, some industries are
production cost is very high. suffering more. According to the TransUnion CIBIL report,
the textile sector and the construction sector have the
Unavailability of raw material and other inputs - For highest MSMEs NPA rates, while the auto industry is
MSME's required raw material skilled work force and other relatively less affected.
inputs, which are not available in the market. Due to
unavailability of these essentials, it is very difficult to produce Reasons of Stress/NPA in MSME sector: There are several
the products at affordable prices. reasons of stress build-up in MSME sector:
Accidents/Natural calamities: A natural disaster is a major
Lack of distribution of marketing channels - The MSME`S adverse event resulting from natural processes of the Earth;
are not adopting the innovative channels of marketing. examples are floods, hurricanes, tornadoes, volcanic
Their advertisement and sales promotion are comparatively eruptions, earthquakes, tsunamis, storms, and other
weaker than the multinational companies are. The geologic processes. MSME sector is one of the affected.
ineffective advertisement and poor marketing channels Southern part of India had witnessed natural calamities
leads to a very poor selling. being on seashore as flood, tsunami etc.

BANKING FINANCE | NOVEMBER | 2020 | 41