Public sector banks seem to be ceding ground to private sector banks and non-banking finance companies when it comes to lending to the micro, small and medium enterprise (MSME) sector.

This is one sector of the economy on which the Modi-led NDA government set great store due to its potential for self-employment/ employment generation and ensuring socio-economic development.

However, a host of factors, including rising bad loans given under the government’s flagship Mudra loan scheme, which is aimed at extending affordable credit to micro and small enterprises; the one-time restructuring of existing MSME loans (permitted by the RBI from January 1, 2019 and to be implemented by March-end 2020) that are in default but ‘standard’ as on January 1, 2019; and capital constraints have slowed down credit flow from PSBs to MSMEs.

Lending by private banks

According to a Kotak Securities report, which is based on a MSME study by TransUnion CIBIL, majority of the year-on-year growth in MSME lending in the third quarter (October-December) of FY19 came from private banks and NBFCs with market shares increasing by about 400 basis points (bps) and about 300 bps, respectively, at the expense of PSBs.

PCA framework

“PSBs are still the majority provider of credit to MSMEs (40 per cent share), but this has consistently reduced in the last five years (from 58 per cent in 3QFY14). However, going forward, we expect this trend to moderate as more PSBs come out of the PCA (prompt corrective action) framework and the impact of liquidity issues shows up in the numbers for NBFCs,” the report said.

That PSBs have turned conservative vis-a-vis MSME lending is underscored by the fact that State Bank of India reported a 7 per cent year-on-year increase in March 2019, recording the slowest growth among all segments of domestic lending. The share of MSME sector in SBI’s gross domestic credit has declined from 15.45 per cent in March 2018 to 14.50 per cent in March 2019.

With the NDA government getting re-elected, banking experts feel that its flagship programmes such as Mudra loan scheme and Start-Up India may be overhauled so that PSBs are encouraged to lend more to MSMEs. Also, these banks are likely to be asked to step up their activity on online platforms such as ‘‘ and Trade Receivables Discounting System.

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