The data shows bank lending to micro and small-scale industrial units fell from 3.1% of gross domestic product (GDP) in 2013-14 to 2.22% in 2017-18. Over the same period, bank lending to medium-scale industrial units fell from 1.1% of GDP to 0.62%. But this decline is part and parcel of the credit cycle and indeed lending to large industrial units as a percentage of GDP saw a larger decline, doubtless because of the Reserve Bank of India’s (RBI’s) asset quality review. Interestingly, RBI data shows that in the priority sector, bank credit to SMEs in the manufacturing sector as at end-September 2018 contracted by 1.4% from a year ago. In sharp contrast, bank credit to SMEs in the services sector grew at a good 17%. This mirrors the overall weakness in manufacturing and the buoyant conditions in the services sector. One reason why public sector banks are reluctant to lend to MSMEs is that a substantial proportion of these loans go bad. According to the MSME Pulse report, for public sector banks, the level of non-performing assets (NPAs) among MSMEs went up from 13% in June 2016 to 15.2% in June 2018. Public sector banks accounted for half the total credit given to MSMEs. The credit quality of MSMEs availing loans from private sector banks and NBFCs is significantly better and as of June 2018, their NPA levels on account of MSME loans were 3.9% and 5%, respectively.
The need for a boost to MSME sector
