MSMEs’ stressed assets are likely to reach 18% by March 2022, according to CRISIL research. According to the report, the slowdown is due in part to the overall macroclimate, which has been damaged by the pandemic and has impeded transaction closure and elevated investor risk aversion, as well as a few structural tendencies.
To begin with, banks prefer to maintain only a small fraction of SRs for assets sold due to the rigorous provisioning criteria for selling banks on holding SRs. ARCs, on the other hand, normally contain only the 15% of SRs required by the regulator. This has created a gap that must be filled either by expanding the number of SRs held by ARCs or by enlisting the help of outside co-investors.
This is a significant reversal from the past, when selling institutions or ARCs subscribed to nearly all SRs until fiscal 2018. With the modified provisioning standards in place, the share of external investors in cumulative SRs issued increased dramatically to 12 percent as of March 31, 2019, from 3 percent as of March 31, 2018. This was due to some large assets that drew investor attention. However, the rate of increase has slowed, and co-investors have been selective. This has exacerbated the ARCs’ growth concerns in fiscal years 2020 and 2021.
Second, unlike just a few years ago, lenders now have a variety of resolution and enforcement frameworks to choose from, and they are assessing and implementing them more aggressively. Many lenders prefer the Insolvency and Bankruptcy Code’s resolution procedures (IBC). The RBI’s Prudential Framework for Resolution of Stressed Assets, which was implemented in June 2019 and allows lenders to resolve stressed assets outside of the judicial system, is another popular option.
“In light of this, I anticipate the stressed assets market will be segmented, with distinct priority areas for different entities in the resolutions space. The placement of each player will be determined by the access to funding and capital, debt aggregation capability, and operational infrastructure,” stated Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings.
Furthermore, when compared to larger firms, smaller businesses are under a lot of stress because of the Mudra loans that have been damaged by the pandemic.
In 2019, the Reserve Bank of India (RBI) expressed worry over the rising levels of stress in Mudra loans, as well as the growing number of nonperforming assets (NPAs) among these borrowers.
Shishu (less than INR 50,000), Kishore (between INR 50,000 and INR 5 lakh), and Tarun (more than INR 5 lakh) are the three types of loans available under the Pradhan Mantri MUDRA Yojana scheme (over INR 5 lakh and up to Rs10 lakh). Commercial banks, non-banking financial firms, and microfinance institutions can refinance loans to micro-enterprises using Mudra.
Credit : CRISIL