Empowering MSMEs with News & Insights

Supply chains are virtually at a standstill, which is causing working capital gap to widen: Report

Updated: May 28, 2020 10:29:02am
image

Supply chains are virtually at a standstill, which is causing working capital gap to widen: Report

New Delhi, May 28 (KNN) Supply chains are virtually at a standstill, which is causing working capital gap to widen. Borrowers with high liquidity will be in a better position to service the stretched working capital cycles. Utilization rates can point towards a borrower’s liquidity position as highly liquid borrowers tend to utilize their limits less, said SIDBI Transunion Cibil Report.

The report titled MSME Pulse said that the structurally stronger MSMEs are likely to be least impacted in the lockdown: Lockdown impact on any entity will depend on multiple factors; two of the most critical factors being credit leverage and the liquidity position of the entity.

The outbreak of COVID pandemic will impact profitability of MSMEs due to declining market demand and rising operating costs in the new way of working. In such a situation, while providing moratorium is RBI mandate, but the challenge is to separate MSMEs that are making use of the moratorium to bring back their cash flows from the MSMEs that are just delaying the default cycle.

The scenario testing study at the events of GST implementation and IL&FS crisis suggests that structurally stronger MSMEs have always sailed through the storm better, the report said.

PSBs continue to be the dominant contributors in providing credit to Micro segment borrowers, holding almost 60% share in this segment. PSBs are playing a critical role in enabling financial inclusion of Micro Enterprises, said the report.

The share of PSBs and Private Banks in the Small segment of borrowers is the same, with each having a market share of about 44%. Medium segment, which has the larger ticket size MSME loans, is again dominated largely by PSBs.

Reduced working capital utilization rates across segments is one of the reasons for shrinkage in overall credit outstanding in the MSME segment. Working capital utilization is defined by the ratio of total outstanding balance to the total credit limit sanctioned for working capital loans. Working capital utilization is observed for various MSME segments across different lender categories for the period Dec’17 to Dec’19.

The study suggests that for PSBs the working capital limits have dropped across segments, with the exception of the very small segment. However, for PSBs the drop in utilization levels is very mild. Whereas, for Private Banks the drop is sharper, across segments.

The overall NPA rate on commercial lending was at 17.4% in Jan’20 and 17.3% in Dec’19, marginally lower than 17.5% in Dec’18, but higher that 16.8% in Sep’19. Delving further into individual segments, NPA rates in Micro1, Micro2 and Small segment have remained range bound.

Within the MSME segment, the NPA rates are higher for larger size exposures. The exception to this trend is the Very Small segment (less than ₹ 10 lakhs exposure) which has a higher NPA rate of ~11.3% in Dec’19. The Medium and Large corporate segments also exhibit higher NPA rate of 18.7% and 19.1% in Dec’19, higher as compared to Sep’19, said the report.

The report further stated that, even though the RBI has recently provided moratorium which will help all types of borrowers, its vital to note that a high leveraged borrower entering into the lockdown situation would have passed through some stress which in-turn would have impacted its business model in some shape and form.

They will have low leverage levels and because of lower leverage, a MSME borrower will have lesser dues to clear.

CIBIL MSME Rank (CMR) factors in a borrower MSMEs leverage position and can be used as a defining indicator for leverage, said the report adding structurally strong MSMEs will have high liquidity.

The full report can be viewed at:

https://www.transunioncibil.com/resources/tucibil/doc/insights/reports/report-msme-pulse-april-2020.pdf

COMMENTS

    Be first to give your comments.

LEAVE A REPLY

Required fields are marked *