CREDIT to Indian Business!

It is in a mess and the guy suffering most has not done anything wrong. He/she seems to be in a proverbial situation of getting punished only because some from his clan have resorted to wrong doing. The difficult situation for India Inc after recent scams is sad. True, the system needs a clean up considering that the last two year’s NPAs among lending to large Indian corporates has increased significantly from 7.9% to 16% and MSME sector increased from 8% to 11%. It is relevant to point out that NPAs have caused largely due to connivance of bad apples among lenders with those taking loans. The incident of bad loans continues to higher among large borrowers.

But the likely sufferers would be smaller borrowers. With barely 10% of approximately 51 million MSMEs having access to formal credit, it is indeed likely to be tougher getting credit for players in the segment. With one of the senior bankers saying that the next wave of dud loans to originate from SMEs further stating that worries with the likelihood of loans to small and medium enterprises are “probably understated”. According to him, the February 12 RBI circular on non-performing asset recognition will lead to an aggravation of the pain. If this is any indication of thinking in the banking sector, then the future for smaller borrowers is likely to be painful indeed.

There are, however, inbuilt contrasts and contradictions. As stated earlier, the occurrence of bad loans among MSMEs is lesser. More than Rs. 2 lakh crore worth of stressed loans may be headed to bankruptcy court after the RBI dumped various restructuring schemes. These loans are mostly from infrastructure sectors such as power, telecom, roads and ports with mostly large borrowers. The argument that public sector banks are more corrupt than private sector banks is likely to be resolved in next few days if current discussions on Twitter and WhatsApp are any indication.

The cascading effect is likely to be a bit of credit squeeze particularly on smaller borrowers. If the biggest pain point of MSMEs is availability of money, then they will need to keep open options beyond credit from banks. The fire in the belly to grow needs to be stoked by fuel options (called money) that are alternate and not considered so far. As a country, we have always observed that there is good money available for good business. The Credit of a business is in its offering and not on the extent of credit available.