One of the most vulnerable segments to economic turmoil is the micro, small and medium enterprises (MSME) and the stress on these loans had surged since the pandemic hit in 2020.
But thanks to the government and the banking regulator’s support through emergency credit schemes and forbearance, the MSME loan portfolio has recovered. Stress triggered by the pandemic has reduced and incrementally too the portfolio performance has been encouraging.
Data from the Reserve Bank of India (RBI) shows that about 9.3 percent of MSME loans had turned bad by March 2022. That is lower than the delinquency ratio of 10.8 percent in FY21. Moreover, special mention accounts (SMA) that show early signs of stress have reduced to 11 percent of the total MSME loan portfolio of the banking industry in FY22 from 15.2 percent in FY21.
Indeed, the emergency credit guarantee scheme (ECLGS) has been a boon to small businesses. Under the scheme, the government gives partial and full guarantee on the credit risk of the borrower which makes it easy for banks to lend without trepidation. About Rs 2.54 lakh crore loans have been disbursed since the scheme was introduced in May 2020. The key test now is how the portfolio's health weathers the onslaught of an inflationary environment amid a still fragile growth recovery.