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The MSME Loan Crisis

The micro, small and medium enterprise (MSME) sector, is the backbone of the Indian economy and brims with raw entrepreneurial dynamism. This sector not only contributes a significant part of our GDP, but is also a huge employment generator. A recent RBI study says that there are 63 mn MSME units in India, employing over 11 crores persons and contribute  to 30 % of our GDP. This sector also contributes to 45% of our manufacturing output and to 40% of our total exports. But then this is the small industries sector and it thus has no voice and no say in policy making and legislation. The MSMEs battle an oppressive environment, where the big business houses rule over them, letting them survive and not thrive. Over 97% of these units work in the informal sector and are India’s response to the dearth of jobs, where the youth venture out on their own in a never say die spirit.

Despite its preeminence, this sector yet faces huge difficulties and hurdles in accessing bank loans and credit, which is critical for their survival and growth. At an aggregate of Rs.12.60 lac crores, loans to MSMEs by banks and NBFCs, were a mere 23% of the loans given to big corporates. Despite the small borrower displaying a much better integrity, banks are generally averse to lending to them. They thus generally insist on a 100% collateral security by way of an immovable property, fixed deposit etc., and personal guarantees when they lend to these small industries and any further loans to support growth too are reluctant. But what is the most prompt is very harsh recovery measures against MSMEs, in the earliest stage of a loan default.

Loans are denied to these small borrowers unless the collateral security furnished is 100%. Such borrowers are directly accountable to banks, the chance of siphoning of funds are much lower and with a credit exposure mostly below Rs 1 crore per borrower, with a 100% security and borrower’s personal guarantee, the banks are pretty much secure, unlike in the case of large borrowers, where all this is virtually amiss. The big borrowers on the other hand give little or zero collateral security, which is generally created out of bank loans itself and not out of the borrower’s personal assets.  With thousands of crores of rupees at stake, in the case of big borrowers, it is the bank which is at risk and thus even in case of an imminent default, the bank gives a privileged kid glove treatment to the borrower. At a recent FICCI seminar, a speaker lamented that despite being in business for over 20 years, she still has to give 100% collateral security for bank loans, failing which she has to forgo growth opportunities.

Despite such a safe loans portfolio of MSMEs, Uday Kotak, now Aisa’s richest banker sees a huge risk, citing significant overvaluation of collaterals, thus raising serious concerns towards bank exposure to the MSME sector. He predict that banks will suffer badly in their loans to this sector. Uday Kotak could be right, but that is because there has been a fall in real estate prices. But despite that the bankers are relatively safe in the MSME loans, as compared to those to big corporates. In the meanwhile, economic inequalities have grown much further in India and the business trends for the MSME are much more difficult and challenging. It is because of their inability to face the onslaught of the big competitors that they will default on bank loans and not merely for the reason of collateral valuation, as Mr. Uday Kotak says.

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