New Delhi, Dec 26 (KNN) The approaching quarter poses challenges for Micro, Small, and Medium Enterprises (MSMEs) as credit availability for these businesses is deteriorating as lenders are exercising caution due to increased 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 proprietor-ship," noted Kalyan Basu, MD and CEO of Vayana TradeXchange, as reported by Businessline.

Higher risk weights and subsequent capital requirements have prompted various lenders, including digital lenders and fintechs, to slow down on unsecured 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 trigger a shift in lending policy. From what we see, lenders want to go slow on small ticket as well as overall retail lending," highlighted Arun Poojari, Cofounder and CEO, Cashinvoice

The decline in credit supply, particularly for personal and unsecured business loans catered to by Non-Banking Financial Companies (NBFCs), is expected to result in increased capital costs for borrowers in the coming months.

As the last quarter traditionally involves heavy credit activity, market participants anticipate significant funding shortages for small businesses.

Kalyan Basu emphasises the unsustainability of MSMEs borrowing at high rates, especially given that over 90 per cent fall in the micro category and operate on thin profit margins.

The blurred lines between personal and business loans in small-ticket loans prompt lenders to seek communication or clarification on borrower categories and appropriate pricing to align with regulations.

The Finance Industry Development Council (FIDC), an NBFC industry body, had previously cautioned that higher risk weights could sharply reduce credit flow to MSMEs, self-employed individuals, and other sectors reliant on unsecured credit from NBFCs.

This situation arises at a critical time when these sectors are emerging from the impact of the COVID-19 pandemic and rural economy-related slowdowns.

(KNN Bureau)