Small and micro businesses in India are responsible for fewer non-performing loans at banks than are large companies, a new report finds.
The report by the Small Industries Development Bank of India (Sidbi) and TransUnion CIBIL found that while the overall non-performing assets (NPA) rate remained between 8% and 11% for small and micro firms in the last two years, the NPA rate of large corporates has more than doubled from 7.9% to 16.9% over the same period (see below graph).
Interestingly the report – which intended to be released quarterly to track MSME credit activity – finds that among small and micro borrowers, it’s NPAs are highest for loans of less than 1 million rupees and those of 50 to 100 million rupees.
The report also found that in the number of first-time business borrowers – mainly micro firms – has increased significantly has increased from 270,000 between January and June 2016, to 400,000 recorded between July and December last year.
In addition firms with loans of under 10 million rupees have grown their credit exposure by 20% between December 2016 and December last year, compared to just 0.5% growth for those firms taking out loans of 1 billion rupees.
Most small and micro firms tap public banks for funding, but private banks are getting stuck in too – having increased their market share from 34% to 40% for the sector between December 2015 and December last year.
The increase has been driven in part by the ratcheting up of the Indian government’s priority sector lending rules – to get banks to lend more to small firms (see this post).
This is good news, as the NPA rate for small and micro firms at private banks has remained fairly constant at 3.7% over the same two-year period – while climbing from 10.3% to 12.4% at public-sector banks.
Credit guarantee scheme boosted
Last month India’s small business minister Giriraj Singh (pictured above) announced the injection of 50 billion rupees ($770 million) by the government into its credit guarantee scheme that helps small businesses to get loans from banks.
This follows an announcement over a year ago by Prime Minister Narendra Modi that the scheme would be recapitalised (see this post).
The scheme, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), was launched in 2000 with a corpus of 25 billion rupees. The new capital brings the corpus to 75 billion rupees ($1.1bn).
Banks are able to use the fund to guarantee up to 85% of any loan they provide to small businesses. The fund acts as a safety net, reimbursing banks when small firms fail to repay loans. In turn small firms don’t have to rely on providing collateral to secure a loan.
The government, which runs the scheme with the Small Industries Development Bank of India (Sidbi), has also adjusted some rules to make it easier for smaller firms to access the scheme. IT infrastructure will also be updated.
The changes will mean among other things that firms that take out a guarantee will no longer pay a fee on the amount lent out, but rather on the outstanding amount.
In addition, 75% of a loan above 5 million rupees will be covered by the scheme, up from 50%, a practice note says.
Importantly, the scheme will now allow guarantee cover for the portion of credit facility (up to 20 million rupees) not covered by collateral security. Termed partial collateral security, the option will become applicable to any new loan guaranteed after April 1.
Since its inception the scheme has approved three million guarantees covering loans amounting to over 1.4 trillion rupees ($25.8bn). In this time the government has paid out 43.2 billion rupees to 166,578 claims (or three percent of all disbursals).
Those firms that received funding created 9.9 million jobs and contributed 83.8 billion rupees in exports.
If this is indeed the real default rate – it is extremely low when compared to that of the overall NPA rate that banks report.
Yet like many such state credit guarantee schemes, there is no publically available evaluation on the scheme, making it difficult to test out Sidbi's numbers.
An OECD report last year of existing studies said though there appears to be evidence that credit guarantees are positive for company access to debt finance, less is known about the financial sustainability of these programmes. Worryingly, it said some studies suggest that loan guarantees are associated with increased default risk of beneficiary companies.
This is particularly concerning given the massive ramp up in lending by the scheme reported last year by Small Business Insight (see this post).
A measure introduced in a circular by the scheme dated 14 March will allow small finance banks with paid up equity capital of at least 1 billion rupees to now also offer the guarantee.
This may help, given that non-performing loans are concentrated more in public-sector banks.
In the end what is needed is better data. States need to commission rigorous evaluations of the performance and cost effectiveness of such schemes. Only then will one know if those firms supported and jobs created will really prove sustainable.
Timm is a South African who writes on small business. He was briefly on holiday in February. Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a