Q4 to be difficult for MSMEs as credit supply thins, lenders turn cautious

The upcoming quarter is likely to be a difficult one for MSMEs as credit supply for micro and small businesses has started thinning with lenders turning cautious following the increase in risk weights on unsecured consumer loans.

“MSMEs form a huge part of this unsecured funding and they will get affected to an extent directly or indirectly. There’s a lot of overlap in retail financing and micro lending segments, and no way to distinguish which funds are going towards proprietorship,” said KalyanBasu, MD and CEO of VayanaTradeXchange.

The increased risk weights and resultant higher capital requirements, has prompted several lenders, including digital lenders, to go slower on unsecured small ticket loans, to avoid any risk build-up amid increased regulatory scrutiny. Fintechs too have said they will go slower on small ticket loans.

“There’s a lot of demand for credit but people are a bit cautious as to how to read the statements coming from banks about slowing down credit and hiking rates. Even a bit of confusion can re-trigger credit policy making and lending approach. From what we see, lenders want to go slower on small ticket as well as overall retail lending,” said ArunPoojari, Co- founder and CEO, Cashinvoice.

Given that a lot of the MSMEs get funded through personal and unsecured business loans, generally catered to by NBFCs, this decline in credit supply and the resultant rise in cost of capital, will transmit to borrowers over the next few months. Add to the fact that the last quarter traditionally tends to be credit heavy, could translate to significant funding shortages for small businesses, market participants said.

“Once lending gets expensive, it will percolate to borrowers in 3-4 months and impact their overall balance sheet and profitability because their competitiveness will also get impacted,” Basu said, adding that it will be unsustainable for MSMEs to borrow at 16-18 per cent rates given that over 90 per cent fall in the micro category and operate on thin margins.

Because the lines in small ticket loans are often blurred between personal and business loans, lenders are then likely looking for some communication or clarification on identifying the right categories of borrowers and pricing it appropriately to ensure they are on the “right side of regulations”, Poojari said.

Last month, NBFC industry body Finance Industry Development Council (FIDC) had warned that the higher risk weights could sharply reduce credit flow to MSMEs, self-employed and other sectors which rely upon unsecured credit from NBFCs, especially at a time when they are emerging from the COVID and rural economy-related slowdowns.