Credit and finance for MSMEs: Micro, small and medium enterprises (MSMEs), which benefited from government measures during the pandemic, will now have to contend with higher input costs and increasing interest rates amid volatility in the commodity prices impacted the profitability of MSMEs, ratings agency Crisil said in its ratings round-up report for the second half of FY23.
The agency’s credit ratio (credit rating upgrades to downgrades) moderated to “expected” 2.19 times in H2 FY23 from 5.52 times in H1 FY23 “because of rising global inflation and the resultant interest rate hikes,” it said. Overall, there were 460 upgrades and 210 downgrades in the credit rating of companies across sectors in the second half.
About 60 per cent of the downgrades were in the sub-investment grade category, largely comprised of MSMEs and as much as around 70 per cent of the downgrades were because of a decline in profitability and/or liquidity pressure.
Read More:-Canara Bank Hikes FD Interest Rate From Today — Check Latest Rates Here
“The downgrade rates have started reverting to their long-term averages. Volatile commodity prices have impacted profitability, particularly of micro, small and medium enterprises (MSMEs), while export-oriented sectors face headwinds from slowdown in their major markets,” said Gurpreet Chhatwal, Managing Director, Crisil Ratings in a statement.
Importantly, a slew of measures was announced by the MSME ministry and finance ministry post Covid such as the ECLGS scheme, revised MSME definition, Udyam registration portal, inclusion of retail and wholesale traders under MSME definition, RAMP scheme, revised CGTMSE, and more.
Read More:-Mumbai Airport To Close Both Runways On May 2 For 6 Hrs; Here’s Why
However, amid growing interest rates with multiple cycles of repo rate hike by the Reserve Bank of India (RBI) to control inflation, which stood at 6.52 per cent in January and 6.44 per cent in February, along with higher commodity prices, MSMEs will be repaying their restructured loans. In fact, because of elevated commodities prices, smaller firms deferred executing orders received, particularly in the first half of fiscal 2023, Crisil noted.
The share of restructured loans in the MSME portfolio of scheduled commercial banks (SCBs) was 5.21 per cent as on September 30, 2022, compared to 5.31 per cent as on March 31, 2022, RBI’s December 2022 Financial Stability Report had noted. The outstanding balance in the restructured account as of September-end last year was Rs 1.07 lakh crore in comparison to Rs 1.06 lakh crore as of March end 2022 with the highest share of public sector banks.
Read More:-Aeroflex Industries to raise Rs 350 crore via IPO; take a quick look
Moreover, the agency also cautioned on the asset quality which remains monitorable in the MSME sector that had seen the highest level of restructuring. While the increasing formalisation of the MSME sector enhances the ability of banks to assess and underwrite loans, Crisil said the sector remains vulnerable to macroeconomic factors such as rise in interest rates.
Despite the concerns, Crisil on Tuesday said the MSME sector’s EBITDA margin will grow past the pre-pandemic level (FY20) to reach 5.7-5.9 per cent this fiscal with the turning of the commodity cycle — with crude oil and steel prices estimated to correct 13-15 per cent and 3-5 per cent respectively this fiscal — along with rising revenue of the sector.
