The gross bank credit by scheduled commercial banks to MSMEs under priority sector lending norms grew by 18.1% in April 2024. This growth is notable compared to the previous year, according to the latest data from the Reserve Bank of India (RBI) on the monthly deployment of bank credit. As of April, Rs 24.6 lakh crore was deployed to the MSME sector, up from Rs 20.84 lakh crore in April 2023.
Priority Sector Lending Boosts MSME Credit
Priority credit to MSMEs in April accounted for 14.9% of India’s non-food credit, which totaled Rs 164.76 lakh crore during the month. This substantial growth reflects the emphasis on supporting the MSME sector through targeted lending.
In the MSME sector, credit to micro and small enterprises (MSEs) grew by 18.6% in April 2024. The credit amount reached Rs 19.64 lakh crore, up from Rs 16.56 lakh crore in April last year. This growth highlights the importance of financial support to smaller businesses, which are often the backbone of the economy.
Medium-Sized Enterprises Also See Growth
Credit to medium-sized organizations also saw a significant increase. It jumped by 16.5% to Rs 4.98 lakh crore in April 2024, up from Rs 4.28 lakh crore in April 2023. This growth indicates that medium-sized enterprises are receiving more financial support, enabling them to expand and innovate.
Despite the robust growth in FY24, the ratings agency Crisil predicts a slowdown in bank credit to MSMEs in FY25. The slowdown is expected amid likely moderation in overall growth in bank credit by around 200 basis points (bps) to approximately 14% this fiscal. This is down from an estimated robust growth of around 16% in the previous fiscal.
Impact on MSME Credit Growth
Bank credit growth in the MSME segment is estimated at around 15% in the current fiscal. This is a decrease from around 19% in fiscal 2024. While the growth remains positive, the slowdown indicates that the sector may face challenges in securing the same level of financial support.
Other sectors eligible for priority lending from banks also saw significant credit deployment. Agriculture received Rs 20.60 lakh crore in April, while housing secured Rs 7.53 lakh crore. Additionally, education loans, renewable energy, social infrastructure, and export credit saw credit amounts of Rs 61,027 crore, Rs 5,712 crore, Rs 2,619 crore, and Rs 13,433 crore, respectively.
New Clause to Address Delayed Payments
Effective April 1, 2024, the government introduced a new clause (h) under Section 43B of the Income Tax Act. This clause aims to address the delayed payment challenge faced by MSMEs. It stipulates that expenses to buyers on invoices from micro and small enterprises must be paid within 45 days if there is an agreement, and within 15 days if there is no agreement. This is applicable in the year of actual payment instead of the year when the expense was incurred.
Also read: Mudra Loans Surpass Rs. 5 Trillion Mark in FY 2023-24
Implications of the New Clause
This new clause is expected to significantly benefit MSMEs by ensuring timely payments. Delayed payments have long been a challenge for small businesses, impacting their cash flow and operational efficiency. By enforcing stricter payment timelines, the government aims to provide much-needed relief to MSMEs.
Financial Support and Growth Opportunities
The increase in bank credit to MSMEs highlights the sector’s critical role in India’s economy. Financial support enables these enterprises to invest in growth opportunities, expand their operations, and create jobs. The growth in credit also reflects the confidence of financial institutions in the MSME sector’s potential.
While the growth in credit is a positive sign, MSMEs still face several challenges. These include navigating the complexities of securing financing, managing cash flow, and dealing with regulatory changes. The predicted slowdown in credit growth for FY25 also suggests that MSMEs need to be prepared for potential funding constraints.
The Role of Financial Institutions
Financial institutions play a crucial role in supporting the MSME sector. By offering tailored financial products and services, they can help MSMEs overcome financial challenges and seize growth opportunities. Continued support from banks and other financial entities is essential for the sustained growth of the MSME sector.
The significant growth in bank credit to MSMEs in April 2024 underscores the importance of financial support for small businesses. Despite the expected slowdown in credit growth for FY25, the MSME sector remains a critical component of India’s economy. Initiatives like the new clause under Section 43B of the Income Tax Act further demonstrate the government’s commitment to supporting MSMEs. By addressing delayed payments and ensuring timely financial support, these measures aim to create a more conducive environment for MSMEs to thrive. As the sector navigates future challenges, continued collaboration between financial institutions, the government, and MSMEs will be key to driving sustainable growth and innovation.