The MSME sector, which employs over 11.10 crore workers in non-agricultural activities and contributes to approximately 50% of India's exports, is the backbone of the economy. Unfortunately, the ongoing health emergency has created a distressing situation for these units, as the severely constrained demand has led to a significant decline in their revenue. This situation is further exacerbated by the pandemic, which has created a myriad of problems for the sensitive MSME sector, as their liquidity depends on the daily demand for their product, and they lack significant cash reserves. This is putting the sustainability of MSMEs at stake, which is concerning since they contribute approximately 30-35% to the GDP. The current scenario presents a very gloomy picture of the prospects of India's economic development. This chapter discusses the nonperforming assets (NPAs) and their impact on the sustainability of the MSME sector. This chapter also discusses the causes and effects NPAs on the sustainability of the MSME sector.
Top1. Introduction
Non-performing assets (NPAs) are assets that fail to generate income or cash flow for their owner, typically due to default on interest or principal payments (Das, 2010). In the context of the Micro, Small, and Medium Enterprises (MSME) sector, NPAs pertain to loans provided to MSMEs not being serviced according to the agreed terms and conditions (Singh, 2013). The impact of NPAs on the sustainability of the MSME sector is substantial.
A survey by SIDBI and credit bureau TransUnion CIBIL revealed that NPAs in the MSME sector increased by 12.59 percent in the fourth quarter of the fiscal year 2021–22, rising from Rs 2.62 lakh crore in Q4 FY21 to Rs 2.95 lakh crore, indicating the influence of Covid. In contrast to 12.5 percent in March 21 and 12.6 percent in March 20, the overall MSME NPA rate as of March 22 was 12.8%.
As per the MSME Pulse August 2022 report, NPAs started rising from Rs 2.42 lakh crore in Q3 FY21, peaking at Rs 3.10 lakh crore in Q2 FY22, before a slight decline to Rs 3.01 lakh crore in the subsequent quarter and further in Q4. Crucially, the decrease in NPAs was evident across all industry sectors, including micro, small, and medium enterprises. The NPA rate for the micro segment was lower than that of the small segment until Q3 FY21. However, the trend reversed, indicating the micro segment was most affected by Covid. In Q4 FY22, the small segment's NPA rate decreased to 10% from 11% in Q2 FY22, while the micro and medium sectors saw NPA rates of 12% (down from 13% in Q1 FY22) and 16% (down from 17% in Q2 FY22), respectively.
Although the gross NPA ratio of MSME banks decreased from 11.3 percent in September 2021 to 9.3 percent in March 2022, the sector's bad assets still remain relatively high, as per the RBI's Financial Stability Report (FSR) released in June of this year. The central bank has cautioned that the restructured MSME portfolio, valued at Rs 46,186 crore, or 2.5 percent of all advances made under the May 2021 restructuring program, could exert pressure on the industry.
As of March 2021, India's medium-sized businesses had a 16.8% NPA percentage, representing a significant decrease from around 18% in June 2020. However, it remained the highest percentage among MSMEs.
Figure 1.
NPA rate of MSME in India from September 2019 to March 2021
Here are some of the ways NPAs can affect MSMEs:
⦁ Credit availability is weakened: Banks and other financial institutions are likely to be more cautious in lending to MSMEs if their existing loan portfolios are burdened with large non-performing loans. This can reduce MSMEs' access to credit, which can affect their ability to invest in growth and expansion (Bose, 2013).
⦁ Increased borrowing costs: Banks and financial institutions may raise interest rates or require higher guarantees to lend to MSMEs with a higher risk profile due to the availability of bank loans. This can increase borrowing costs for MSMEs, which can affect their profitability and sustainability.
⦁ Disruption to core business: MSMEs struggling with NPAs have to spend a lot of time and resources managing their debts and dealing with creditors. This can distract them from their core business, which can affect their competitiveness and sustainability.
Covid 19 is another major factor to disrupt the core business. Due to various mobility limitations, a temporary halt in tourism and hospitality, very little transportation activity, closure of schools and colleges, and other factors, the service sector, which is the main driver of economic growth and the largest contributor to GDP, has been severely impacted (Aneja and Ahuja, 2021).