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Credit quality of small businesses remain stable despite declining to 7-year low in FY20

Credit and Finance for MSMEs: The credit quality of small and medium enterprises (SME) in FY20 has declined by 6 basis points to a seven-year low at 1.03 MCR from 1.09 MCR in FY19, according to the assessment of credit quality of rated entities by rating agency CARE Ratings. From 0.88 in FY13, the MCR peaked to 1.17 in FY16. Nonetheless, being above 1 for the recently concluded financial year “was seen as being stable,” the agency said even as Indian businesses have been pressured by the slowdown in the domestic economy and tight financing conditions in the domestic economy. MCR is the ratio of upgrades and reaffirmations to downgrades and reaffirmations and an increase in it implies improving credit quality of rated businesses and vice versa.

“There has been a higher proportion of reaffirmation and upgrade in ratings of SMEs. This would be because of improvement in probably their financial position. In some cases, their scale of operations might have seen an improvement while their debt servicing parameters and liquidity position would also have been comfortable. There could be case-specific reasons as well,” Kavita Chacko, Senior Economist, CARE Ratings told Financial Express Online.

Small businesses are currently reeling under the adverse impact of Coronavirus crisis and the 21-day lockdown amid declining demand and supply chain disruption. According to a survey of 35,000 startups, small businesses and entrepreneurs by the community social media platform LocalCircles recently, 71 per cent respondents said they are witnessing lower demand for their products and services while 48 per cent are experiencing supply disruption or increase in supply costs. Over 18,000 responses were received in the survey. To overcome the negative impact of the Coronavirus, 63 per cent respondents said they will cut costs which included cutting down on discretionary expenses, reduce or exit non-essential supplier projects and reducing employee costs. This would certainly have an impact on their credit quality as well.

“It is difficult to say how much impact would be there because we are not certain about the scale of the economic impact of the current situation which is so dynamic. What situation would be post lockdown, when things would return to normal etc. would be assessed in the next few months to have a clearer picture. However, there would definitely be an impact on SMEs that would have a bearing on credit quality,” added Chacko.

The credit quality decline, however, has been steeper in the case of rated large enterprises in comparison to SMEs. The MCR for large enterprises in FY13 stood at  0.81 which increased to 1.03 in FY14, peaked to 1.17 in FY15 before it started declining to 1.09 in FY18, 1.04 in FY19 and 0.96 in FY20 reflecting the higher number of rating downgrades.