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Credit and Finance for MSMEs: Non-banking financial company (NBFC) lenders to MSMEs are staring at a significant impact on lending for at least the coming two-three month period as the second wave of the pandemic begins to take its toll on business operations. The impact is likely to be severe from April onwards as various Covid-related restrictions including night curfew, weekend lockdowns, weekly lockdowns, restricted timings for shops and markets to operate, etc., are likely to hit revenues for MSMEs now. “MSME lending sector will get impacted very heavily in the next two-three months as many of the companies are impacted due to lockdown. While industries are asking for operations, currently the loss of life is too high to build any conviction to run businesses unless healthcare support improves,” Akshay Mehrotra, Founding Member, Fintech Association for Consumer Empowerment (FACE) told Financial Express Online.
However, MSMEs in India have proven to be resilient time and again. The majority were able to bounce back from last year’s lockdown-induced challenges including labour migration, working capital issues, etc. MSME lending in current times is contingent on the control of the Covid pandemic in India. Currently, the lending market is largely confined to the businesses which are under the essential category. “Geographies, where the Covid impact is relatively lower, are seeing a higher MSME credit flow. Overall, most lenders are down to 30 per cent – 50 per cent of their usual volumes. The second quarter of FY22 is expected to be business as usual,” Tushar Drolia, Chief Business Officer, SMEcorner told Financial Express Online. The MSME lending startup had last raised $30 million in Series B funding from Paragon Partners, Quona Capital, Accion Venture Lab, and others.
Lenders are likely to reduce their exposure to sectors and geographies that are most impacted by Covid such as automobile, retail, aviation, real estate, logistics, hospitality, etc., and key metros respectively. Moreover, a reduction of 30-40 per cent in collection efficiencies is also expected. “The overall MSME business will be muted in the next two months because of the restrictions and possible lockdowns. Hence the demand from this segment is likely to be lower. On the supply side – amidst the scenario of the pandemic flareup, the lenders shall be more circumspect and would not be averse to lower volumes for the next two-three months,” Sanjay Sharma, Managing Director, Aye Finance told Finance Express Online.
Moreover, the default rate is also likely to go up for the coming period of impact even as the estimates are likely to change based on the lockdown situation in the coming months. “We are expecting an increase of 10-20 per cent in default but for a short duration of time. Our model is based on a case-based success rate, thus default is on per case and the percentage is applicable to all time frames. It is majorly on monthly basis,” Rishabh Goel, CEO and Co-founder at debt collection management platform Credgenics told Financial Express Online. The company had witnessed an improvement of 15 to 20 per cent recovery rate before the second wave of Covid.
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Lenders were also of the opinion that another round moratorium might be required by the Reserve Bank of India if the business activity post two-three months doesn’t improve. The magnitude to which small businesses are impacted can be assessed only by the second half of May even as it is also dependent on the number of cities which go under a partial or full lockdown. “If the business activity around that period continues to be severely impacted, then the collection would be a serious challenge and NPA rate for lenders will start going higher. A moratorium under such circumstances would definitely help the banks and other lenders to take care of stress. However, if the impact on business looks minimal at that time, a moratorium could be counterproductive. Moratoriums should be brought in only when absolutely required. A lot depends on what is the impact for the next 30 days,” added Drolia.
However, instead of a blanket moratorium across the board, RBI could allow lenders some room to offer reduced repayment installments to those customers, whose business has been impacted further by Covid 2.0. “This would be akin to a restructuring program that RBI had allowed in the last financial year wherein the loss provisioning metrics were relaxed. In this once-in-a-century market disruption, even good prudent Lenders need regulator’s support to nurse their books to health,” said Sharma.
Recently industry association for NBFCs Finance Industry Development Council (FIDC) had written to RBI seeking another round of loan restructuring for businesses and consumers witnessing stress. The association in a letter to the central bank also sought liquidity support for on-lending to MSMEs. “It is feared that this second wave of Covid will peak sometimes in May and then possibly start climbing down in June. It will not be long before the NBFC industry starts reeling under the pressure of increased NPAs and at the same time, handling the demand of moratorium and/or restructuring from its existing and deserving customers,” FIDC said.
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