A change in the definition of a small company will increase the risk of weakening banks' balance sheets

- Despite many concessions and concessions to MSMEs, they quickly become vulnerable to economic shocks

- Through schemes like ECLG, there is pressure on banks, especially government banks, to disburse credit.

A recent report revealed that one out of every six loans extended to Micro, Small and Medium Enterprises (MSMEs) under the Emergency Credit Line Guarantee (ECLG) scheme has gone bad. It was also reported that most of the MSME loans converted into bad loans in the last 27 months were of less than Rs.20 lakh. 16.40 percent or 16 lakh loans have become non-performing assets (NPA) out of the total 98 lakh loans released by National Credit Guarantee Trustee Company Ltd. (NCGTC) has declared. NCGTC has been constituted to monitor these loans.

In May 2020, the government announced the ECLG scheme to provide support to MSMEs during the Corona period. The two-year moratorium on loans under this scheme was over. The government has provided a guarantee against the loans secured under ECLG. MSMEs cannot undertake expansion programs even under normal circumstances due to various reasons, especially financial constraints. Due to lack of expansion they are seen in the same position for years. The MSME sector was hit the hardest in the Corona epidemic. Considering the fact that the country's MSMEs were facing challenges like liquidity crunch, delayed payments, default risk, supply chain disruption and labor shortage, the government has undertaken an exercise to provide support to them through a credit guarantee scheme.

It is to be mentioned here that 65 percent of the banks participating in the fifteenth round of FICCI-IBA survey expressed concern about the increase in NPAs of the MSME sector in the banking industry in the next six months.

This concern of banks indicates weakness in the MSME sector, despite the fact that the government has recently revised the definition of what constitutes a small company in terms of capital and size. By changing the definition, the government has included more companies in the small company. The change in definition is believed to be part of easing the compliance burden on companies.

A company with a turnover of up to Rs 40 crore or less and a paid-up capital of Rs four crore or less is covered under the definition of small company. Earlier this standard was between Rs 20 crore and Rs 2 crore. Smaller companies are given more leeway in compliance than larger companies. Not only do small companies not have to provide cash flow statements, they can manage to hold board meetings only twice a year and can present concise annual returns.

The government has been providing a series of reliefs for the past several years to support small companies or MSMEs in the country. It has been observed time and again that MSMEs are vulnerable to economic shocks despite many concessions and concessions. The bad loans given to MSMEs during the corona period is a recent example. As the government has become the guarantor for loans under the ECLG scheme, banks also do not hesitate to provide loans to small companies. According to Reserve Bank statistics, 90 percent of the loans disbursed to companies in the first five months of the current financial year went to small companies.

Corona and its impact on the industries have been removed now, but apart from the increase in inflation and operating costs, the increase in interest rates by banks is becoming a new challenge for small companies.

From the point of view of asset quality, the NPAs of the country's banks are decreasing but they have not come out of this problem in a way that can be said to be favorable, the possibility that the change in the definition for small companies will create an unfavorable situation for the banks cannot be ruled out. Through schemes like ECLG, there is pressure on the banks, especially the government banks, to disburse credit and therefore the banks are lax in disbursing loans, which ultimately affects the banks concerned. A policy of providing credit to small businesses becomes necessary in any country in the face of economic weakness, no doubt but in a country like India it does not seem appropriate to limit this responsibility to government banks and increase the burden on them. Providing incentives to provide credit to various sectors of the economy Planning is good, but it must be ensured that the results are not disappointing.

Due to the lack of formation of special financial institutions to provide credit to the MSME sector in the country, they cannot borrow at competitive rates. They have to rely more on banks to meet their financial needs. As cash flows from their customers to the MSME sector remain uncertain, the banking sector is keen to finance them only when the government provides a guarantee of repayments. Now that the government has broadened the definition of small companies to cover more companies, it may be the turn of banks to release loans to more and more small companies under government schemes or even at its behest. Let's expect banks to be careful in releasing loans to small companies, otherwise the asset quality of banks will not deteriorate again.