The Micro, Small, and Medium Enterprises (MSMEs) sector is among the vital drivers of a country’s economy due to its vital contribution to job creation and economic growth. Despite multiple loan restructuring schemes and packages put forth by the Reserve Bank of India (RBI) and the government, the Covid pandemic has massively affected the MSMEs. The Gross Non-Performing Assets (NPAs) or loans defaulted by MSMEs surged by Rs 20,000 crore from September 2020 to September 2021 while accounting for 9.6 % of gross advances compared to 8.2 % in September 2020.
Understanding Non-Performing Assets (NPAs)
A non-performing asset (NPA) is a classification for loans that are in default or arrears on scheduled payments of principal or interest. In most cases, loans become non-performing when payments haven’t been made for at least 90 days. Gross NPAs are the total loans defaulted by individuals who have acquired loans from financial institutions while net NPAs are the remaining amount after deducting the provision amount from the gross NPAs.
The Impact of Covid-19 on MSMEs
The spike in bad loans occurred despite the RBI announcing four loan restructuring schemes for MSMEs between January 2019 and May 2021. Due to the strict nationwide lockdown imposed in March 2020 during the pandemic, thousands of MSMEs had to shut down or became sick. Several accounts were restructured under these schemes, but the rise in bad loans still ensued.
Reviving MSMEs: Measures and Initiatives
In response to the crises, the RBI and the government initiated several measures, one of which includes the Emergency Credit Line Guarantee Scheme (ECLGS). This scheme provided Rs 3 lakh crore of unsecured loans to MSMEs and businesses. Moreover, the RBI extended the one-time restructuring of loans to MSMEs without an asset classification downgrade. Despite these efforts, thousands of units in default could not benefit from these restructuring schemes and packages due to their ineligibility under the ECLGS scheme.
Credit Slowdown in the MSME Sector
According to the RBI’s Financial Stability Report, credit to the MSME segment experienced a slowdown by the end of September 2021 compared to March 2021. The decline was most noticeable in the sub Rs 25 crore ticket size across major bank groups.
Legal Framework for NPA/Bad Loans
To address NPAs or bad loans, India has laws and provisions in place like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 and the Insolvency and Bankruptcy Code (IBC). Furthermore, initiatives like promoting Self-Help Groups, MSMEs, and implementing the Right to Education Act play a pivotal role in achieving the government’s objective of inclusive growth.
