MSMEs are the Achilles heel for non-bank lenders

MUMBAI: India’s non-bank lenders are bracing for a deluge of delinquencies from micro, small and medium enterprises (MSME), the worst hit by the pandemic.

The concern is despite improved repayment collections over the past two months, as lenders believe it is a temporary phenomenon.

The collection efficiencies of non-bank lenders have improved even for vulnerable segments such as MSMEs and micro finance. Analysts at Crisil Ltd estimate that collection efficiencies were 65-70% of pre-pandemic levels in August for MSMEs and micro finance. In comparison, collection efficiencies were 25-30% during the lockdown months of April and May, and 55-60% in June and July.

“Businesses in big cities are still impacted, but in many areas they are back in business. We have seen improvement in our collections,” said Rajesh Sharma, managing director at Capri Global Capital Ltd, a non-bank lender catering primarily to small businesses.

Capri Global has operations mostly in the west and northern India, which are among the most affected by the pandemic. With restrictions easing across the country, regional lockdowns have made it challenging for businesses. Sharma believes that the pick-up so far in collections is encouraging but further improvement is tough.

Analysts at Edelweiss Securities pointed out that most MSMEs are yet to see more than 60% of pre-pandemic cash flow levels. “While timing of the credit cost and headline non-performing loans may differ, we maintain that microfinance and MSME segments remain the most vulnerable to covid-19 disruption,” they wrote in a note.

The government’s subsidy schemes and the Reserve Bank of India’s (RBI) liquidity measures may have helped so far. Credit guarantees offered by the government have encouraged banks to lend to MSMEs. However, small businesses need demand to revive and this has been slow so far. Consumption demand is expected to recover only slowly. The outlook on cash flows is still bleak for them. Ergo, lenders would be right in their caution towards loans to MSMEs.

Analysts at Crisil expect non-bank lenders to see a sharp rise in delinquencies this year largely because their exposure to small businesses. The proportion of bad loans could rise by as much as 250 basis points. While restructuring can bring this down, it is unclear whether non-banks would adopt the method widely.

Meanwhile, other loan segments may perform only marginally better. Non-bank lenders can rely on home loans to keep asset quality from deteriorating sharply. Housing loans and even vehicle loans where borrowers are salaried is expected to withstand the blow of the pandemic. Despite the subdued outlook on wages and employment, the collection efficiencies in these loans have shown sharp improvement.

But the fact remains that MSME loans are going to be the weakest link in the balance sheets of non-bank lenders. A one-time restructuring relief would help but a recovery in consumption demand is key for their performance to improve.

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