Bad loans. Public sector banks report sharp slippages in MSME loans in Q1

In a visible sign of stress in the MSME portfolio, public sector banks reported a sharp jump in fresh slippages in their small business loan book during the first quarter of FY22. The second wave of the pandemic appears to have further impacted small businesses, severely curtailing their repayment ability.

The country’s largest lender State Bank of India posted its highest ever quarterly net profit at ₹6,504 crore in Q1FY22. However, fresh slippages of the state-owned lender jumped more than four times to ₹15,666 crore in the first quarter of the current fiscal against ₹3,637 crore of slippages in the year-ago quarter. Over 40 per cent of SBI’s total slippages in Q1 or ₹6,416 crore came from the MSME sector.

Similarly, other major PSU banks like Bank of Baroda, Indian Bank, Punjab National Bank and Union Bank of India have all witnessed a substantial jump in fresh slippages from the MSME sector.

Nearly 59 per cent of Indian Bank’s fresh slippage in Q1FY22 at ₹4,204 crore came from the MSME sector while in the case of Canara Bank, MSME sector accounted for 58 per cent of the total slippage of ₹4,253 crore during the said period.

RBI’s caution

In its Financial Stability Report (FSR) for July, the Reserve Bank of India had cautioned that banks face the prospect of a rise in non-performing loans, particularly in their small and medium enterprises (SME) and retail portfolios.

“Within the domestic financial system, credit flow from banks and capital expenditure of corporates remain muted. While banks’ exposures to better rated large borrowers are declining, there are incipient signs of stress in the micro, small and medium enterprises (MSMEs) and retail segments,” the report noted.

On a year-on-year basis, the overall slippages of all public sector banks collectively jumped more than four times to ₹53,914 crore in Q1FY22 from ₹13,188 crore in Q1FY21. SBI, PNB, Union Bank of India, Bank of Baroda and Canara Bank are among the top five banks with highest fresh slippages collectively accounting for 75 per cent of the total slippages in the first quarter.

In its bid to ease the stress in MSME portfolio of banks and NBFCs, the RBI has been introducing various restructuring schemes. Since 2019, the RBI permitted restructuring of temporarily impaired MSME loans (of size upto ₹25 crore) under three schemes. Accordingly, public sector banks have collectively restructured loans worth ₹56,866 crore under the restructuring scheme of January 2019, February 2020 and August 2020.

“Despite the restructuring, stress in the MSME portfolio of PSBs remains high,” the central bank said in its FSR.

ECLGS schemes

The current spike in fresh slippages comes in the backdrop of significant increase in credit disbursement to the MSME sector during 2020-21 aided by the Emergency Credit Line Guarantee Scheme (ECLGS). Launched in May 2020, the ECLGS aims to provide collateral-free and government-guaranteed loans to MSMEs and other entities affected by the pandemic. The government has since extended the scope of the scheme from time to time through ECLGS 2.0, 3.0 and 4.0 to cover more sectors of the economy.

According to SIDBI-TransUnion Cibil’s quarterly report ‘MSME Pulse’, strong rebound in credit demand, accompanied by equally strong credit supply and ECLGS support, has led to growth in the credit outstanding amount of MSME sector to ₹20.21 lakh crore, with a YoY growth rate of 6.6 per cent.

“In FY21, the country disbursed loans worth ₹9.5-lakh crore to MSME sector; higher than ₹6.8-lakh crore in FY20. This sharp jump in MSME lending was supported by the Atmanirbhar Bharat scheme of ECLGS which provided 100 per cent credit guarantee to lenders,” the report said.