RBI red flags signs of stress in MSMEs, bad loans likely to rise

The Reserve Bank of India (RBI) has warned of a rise in bad loans in 2022 and emerging signs of stress in micro, small and medium enterprises (MSMEs) and the microfinance segment, which call for close monitoring of these portfolios.

Macro stress tests for credit risk indicate that the gross non-performing asset (GNPA) ratio of banks may increase from 6.9 per cent in September 2021 to 8.1 per cent by September 2022 under the baseline scenario and to 9.5 per cent under a severe stress scenario, according to the Financial Stability Report (FSR) of the RBI.

NPAs to advances ratio declined from 8.2 per cent at end-March 2020 to 7.3 per cent at end-March 2021, and further to 6.9 per cent at end-September 2021.

However, the report said banks are financially healthy and strong. “Balance sheets of banks remain strong and capital and liquidity buffers are being bolstered to mitigate future shocks,” RBI Governor Shaktikanta Das said in the report. “While the pandemic induced bouts of volatility, spillovers and heightened uncertainty are challenging, the Indian financial system has stood up well and remains well prepared to meet the funding requirements of the economy,” Das said.

The FSR said MSME portfolio of PSU banks and private banks indicates accumulation in NPA and SMA-2 categories in September 2021 relative to March 2021. NPA level was 18.5 per cent as of September 2021, as against 16.8 per cent in March 2021.

Credit to the micro, small and medium enterprise segment slowed down(y-o-y) by the end of September vis-a-vis March. The decline was particularly noticeable in the sub Rs 25 crore ticket size across major bank groups.

Credit to the MSME segment slowed down (y-o-y) by the end of September 2021 vis-a-vis March 2021. The decline was particularly noticeable in the sub Rs 25 crore ticket size across major bank groups. Under the Emergency Credit Line Guarantee Scheme (ECLGS), loans amounting to Rs 2.82 lakh crore were sanctioned till November 12, 2021, of which Rs 2.28 lakh crore was disbursed (Rs

1.94 lakh crore by SCBs, forming 20.6 per cent of the incremental credit during the period), it said. The report said the global economic recovery has been losing momentum in the second half of 2021 in the face of resurfacing Covid cases, the new variant Omicron, supply disruptions, elevated inflationary levels and shifts in monetary policy stances and actions across economies.

The report says, “But with the second supplementary demand of grants worth Rs 3.73 lakh crore, presented in December, the budgeted fiscal deficit of 6.8 per cent of GDP may come under strain?” The capital to risk-weighted assets ratio (CRAR) of banks rose to a new peak of 16.6 per cent and their provisioning coverage ratio (PCR) stood at 68.1 per cent in September 2021.

Slowdown in credit

Credit    to    the    micro,    small     and     medium     enterprise     segment     slowed     down (y-o-y) by the end of September vis-a-vis March. The decline was particularly noticeable in the sub Rs 25 crore ticket size across major bank groups.