COVID second wave hits MSME sector hard; bad loans on the rise

COVID second wave has impacted the micro, small and medium enterprise (MSME) sector negatively with the segment contributing almost 60 per cent to Non Performing Assets (NPAs) of banks in April and May – a two-fold rise in comparison to last year.

The impact on the MSME sector is deeply affecting the economic recovery process, which was already hampered by lockdown last year, shows data on bank loan defaults and non banking financial corporations (NBFCs). The MSME segment contributes a third of India’s gross domestic product (GDP) and gives work – directly or indirectly – to 11 crore people. About 20 crore households are dependent on the MSME sector.

As a consequence of the second wave, people’s income has gone down and loan repayment defaults have gone up. The effects of the second wave are being seen on the service sector which includes hotels, travel, trade and communication and would eventually on the large scale industry, which is impacted by trouble in the unorganised segment. As a result of this distress, consumption has been steadily going down, reflecting on the performances of almost all sectors.

A bank official told Indian Express: “The elements of the defaults are labour constraints, transportation issues due to lockdown, non-availability of raw material and uncertain cash flows.”

While the situation is critical for organised lending through banks, micro finance companies, which provide low-guarantee capital to micro entrepreneurs, too have reported a fall in recovery due to COVID second wave in April-May this year.

“Our customers who are majorly small traders and business people engaged in daily use products, were unable to open their shop and their livelihood has been accordingly impacted,” said P N Vasudevan, managing director and CEO of Equitas Small Finance Bank, told Indian Express.

A study by community platform LocalCircles found that almost 60% of start ups and MSMEs in the country will either cut down production or shut shop or sell assets to deal with the second wave of COVID-19 pandemic.

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The study also shows that only 1/5th of MSMEs have the capacity to survive for over three months. About 40 per cent are either without cash or have capital which may not last beyond a month.

Retail sales for May this year are down -79 per cent when compared with sales in May 2019. The hotel industry too suffered a loss of Rs 524 crore in 2020-21. Air travel is down and is likely to recover only by 2023.

The auto industry too was badly hit in May with production of four-wheel passenger vehicles and two-wheelers contracting to one-third of the previous month.