The outstanding credit to small businesses by banks has declined for the first time in 14 months as against the belief of RBI claiming two weeks ago that there is no liquidity crunch in the sector.
As per the latest data released by the central bank for the month of September, there has been fall in credit outstanding to MSMEs by as much as 1.4% in the reporting period over the same time in the year ago period. Notably, this is the sharpest drop since February 2017 when the sector was facing headwinds due to demonetisation. In February 2017, the contraction in credit disbursal to MSMEs was to the tune of 5.2% as against the same period last year.
Since September, lenders have resorted to tightening credit flow to micro small and medium enterprises and the trend is likely to continue and in fact the drop in credit flow to the sector is set to trend higher for the remaining two months of the current calendar year. It is the same month i.e. September when the default by infrastructure financing major IL&FS has been reported.
It is noteworthy that the total bank credit outstanding and that lent to the industry including the MSME sector has registered a surge of 11.3% and 2.3%, respectively during the September month over the corresponding month last year. Also, if we don't include the MSME sector, industry-wise, credit flow to medium and large-scale industries also saw credit outstanding increase by 3.3 and 2.9 per cent, respectively.
The RBIs board meet scheduled for November 19 will work out ways to relax some norms and ease credit disbursal to MSMEs.