Low demand, inflationary pressures, and delays in receivables have pushed more MSMEs (Ministry of Micro, Small and Medium Enterprises) to approach financial institutions for funds this festive season. This is reflected in the recent rise in credit offtake data as well.

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According to CareEdge Ratings, credit offtake grew at 17.9 percent YoY, reaching a decadal high mark, reporting robust growth for the fortnight that ended October 7, 2022.

"This is driven by the retail credit, higher working capital demand amidst high inflation, and lower funds raised in the capital market and is expected to remain elevated in the short term due to the ongoing festival season," stated the report.

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The credit outstanding of the industry segment registered a growth of 11.4 percent YoY in August 2022 from 1.5 percent in the year-ago period due to inflation-induced higher working capital demand.

Prashant Patel, president of FISME said, "The increase in credit period has been a concern for MSMEs. From the earlier 60-day period, it has gone up to 120 days." In some sectors, it has even touched 190 days and this has forced MSMEs to approach banks for their capital needs.

He said even though the business was slow last year, receivables were not much of a concern. But it is now aching the industry. Patel said the banking sector still needs to be a lot more flexible.

"When banks fail to pass on the revised interest rates or fail to provide timely services, many MSMEs tend to move to another bank that is offering better services. However, this move by business is hit by an unrealistic penalty and clauses put forth by the lenders," Patel said.

The association, meanwhile, has raised its concerns with the finance ministry and other challenges faced by MSMEs.

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Meanwhile, many micro and small enterprises are also dipping into funds of NBFC-MFIs as well. Although disbursements in Q1FY23 were impacted by revised regulations, CareEdge Ratings expects NBFC-MFIs to record a healthy loan growth of around 30 percent YoY in FY23 (in AUM terms).

Joint liability group (JLG) — including small farmers, tenant farmers and micro-enterprise & others — continue to dominate the loan book profile. However, with the growing ticket size across loan products and the new RBI guidelines, the share of individuals and MSMEs may gradually increase in the portfolio mix in the medium term, the report stated.

Sanjay Kumar Agarwal. senior director of Care Ratings said, "Small borrowers have shown resilience and that is why we have seen growth in the sector. This growth is more related to the catch-up that was due. The catch-up on the growth has not taken place in the last few years."

According to RBI data, the MSMEs' borrowings stood at Rs 18.15 lakh crore in August 2022 as against Rs 14.64 lakh crore in August 2021 — a rise of 24 percent. Thus, implying rising lending to the sector.

Medium industries recorded credit growth of 35.6 percent in August 2022 as compared with 52.3 percent last year, while credit growth to micro and small industries accelerated to 28.2 percent from 12.1 percent during the same period.

"Driven by Emergency Credit Line Guarantee Scheme (ECLGS), MSME growth too has remained strong. Corporate loans indicate a shift from the capital market to bank borrowings as hardening bond yields have prompted companies to optimise their borrowing cost," CareEdge Ratings report said.

In March this year, union minister of state for finance, Bhagwat Kisanrao Karad in a reply to a question in Rajya Sabha said the National Credit Guarantee Trustee Company Ltd, the agency operating the ECLGS, said a total of 1.18 crore businesses have been supported with 100 percent guaranteed collateral-free loans under ECLGS — of which about 95.21 percent were MSMEs. At present, the government has extended the scheme till March 2023.

During the reply, the minister also stated MSMEs are reflecting signs of stress. Patel said most MSMEs are taking loans to meet their capital requirements which is more likely to be a temporary phenomenon. He added only when demand picks up, there will be steady growth in credit.