There is good news for the micro, small and medium enterprises sector (MSME) sector. A report by credit rating agency Acuite Ratings on Wednesday said that the sector is back on the growth track, and will see a considerable increase in the credit demand in the coming years, thanks to strong recovery in the economy post-demonetisation and implementation of GST.

The reports adds that this credit demand can be fulfilled if lending by public sector banks (PSBs) is revived. “Non-banking financial companies (NBFCs) and private sector banks have significant opportunity to scale up their business by Rs 4.5 lakh crore in the mid-corporate and MSME space over the next two years. However, their lending may still not be adequate to meet the increasing credit demand. We believe that there is a need to revive fresh lending by PSBs to these segments through specific measures,” said the report.

The report attributed the strong credit demand in the MSME sector to the significant growth in revenues of companies. The net profit in this sector has also tripled in FY18 over FY17.

“There is an all-round improvement in the financial performance of these MSMEs in FY18 versus FY17 with a robust 27% growth in operating income and 66% growth in operating profits,” said Sankar Chakraborti, CEO, Acuité Ratings.

He added that “liquidity challenges also appear to have receded with improvement in the working capital parameters, particularly the debtor position, which has declined from 100 days as on March 2017 to 78 days as on March 2018. These figures reinforce our belief that the MSME sector is already on a recovery path and should continue to sustain the improved performance in FY19”.

Credit information company, TransUnion CIBIL, also agreed that bad debts in the MSME sector has largely remained stable as against bad loans in the large corporate segment.

The report attributed the strong growth to the government’s role, such as increase in spending by government bodies, which resulted in a substantial increase in the order book for small and mid-sized construction companies.

“In FY18, there has been a steady improvement in private consumption, which was reflected in a 10.4% growth in nonconsumer durable segment, thereby benefitting the demand environment for MSMEs,” the report stated.

Other measures include banks and other lending institutions revising the NPA classification period to 180 days instead of the standard 90 days, which has allowed the companies more time to access other fund facilities. Besides, the report suggested that the reforms announced in Budget 2018 will fuel growth in the sector. For instance, the reduction in corporate tax for companies with a turnover of less than Rs 250 crore to 25% is expected to show significant improvement in the financial performance of  companies.

“All such measures are helping not only to bring in but also ease the transition of MSMEs into the formal economy. There is a good pick up in credit to micro and small enterprises in the March quarter, and we are hopeful that this will be sustained in the current year,” said Mohammad Mustafa, chairman and managing director, Small Industries Development Bank of India.

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