RBI reports signs of stress in MSMEs, bad loans expected to rise

The Reserve Bank of India (RBI) has warned of an increase in bad loans in 2022 and the emergence of signs of stress in the micro, small and medium enterprises (MSMEs) and microfinance segment, which require monitoring narrow of these portfolios.

Macro stress tests for credit risk indicate that banks’ gross non-performing asset ratio (GNPA) could drop from 6.9% in September 2021 to 8.1% by September 2022 in the scenario benchmark and 9.5% in a severe stress scenario, according to the RBI’s Financial Stability Report (FSR).

The APM / advances ratio fell from 8.2% at the end of March 2020 to 7.3% at the end of March 2021, then to 6.9% at the end of September 2021.

However, the report says the banks are financially sound and strong. “Bank balance sheets remain strong and capital and liquidity cushions are strengthened to mitigate future shocks,” RBI Governor Shaktikanta Das said in the report. “While the pandemic has caused episodes of volatility, fallout and heightened uncertainty, India’s financial system has resisted well and remains well prepared to meet the financing needs of the economy,” Das said.

The FSR said that the MSME portfolio of PSU banks and private banks showed an accumulation in the NPA and SMA-2 categories in September 2021 compared to March 2021. The NPA level was 18.5% in September 2021, against 16.8% in March 2021.

Explain

Credit slowdown

Credit to the micro, small and medium-sized enterprise segment slowed at the end of September compared to March. The decline was particularly noticeable in the size of banknotes under Rs 25 crore in major banking groups.

Credit to the MSME segment slowed (year-on-year) at the end of September 2021 compared to March 2021. The decline was particularly noticeable in the size of notes below Rs 25 crore in major banking groups. Under the Emergency Credit Line Guarantee Program (ECLGS), loans in the amount of Rs 2.82 lakh crore were sanctioned until November 12, 2021, of which Rs 2.28 lakh crore were disbursed (Rs 1.94 lakh crore by SCBs, forming 20.6% of the additional credit during the period), he said.

The report says the global economic recovery lost momentum in the second half of 2021 amid the reappearance of cases of Covid, the new Omicron variant, supply disruptions, high inflation levels and changes in positions and monetary policy actions in economies.

The report said, “But with the second additional grant request worth Rs 3.73 lakh crore, submitted in December, could the budgeted budget deficit of 6.8% of GDP be strained?”

Banks’ risk-weighted assets (CRAR) ratio reached a new high of 16.6% and their provisioning coverage ratio (PCR) stood at 68.1% in September 2021.

Credit slowdown

Credit to the micro, small and medium-sized enterprise segment has slowed
(year-on-year) by the end of September compared to March. The decline was particularly noticeable in the size of banknotes under Rs 25 crore in major banking groups.

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