Credit flow to the MSME sector in September fell for the first time in the past 14 months. According to data published recently by the central bank, credit outstanding to the sector witnessed 1.4 percent y-o-y fall for the month. It is the sharpest contraction since February 2017. In this backdrop, the last week decision by the RBI board to consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore is, though not enough, a welcome one.

Details show that while credit flow to the MSME sector saw a sharp decline, total credit outstanding and that to the industry segment (including MSMEs) rose 11.3 percent and 2.3 percent in September. Additionally, according to some experts, the decline may sharpen further in October and December, once the data for the same is available. Considering these concerns, continued efforts are imperative to push credit to the sector.

It must also be noted that while growth in bank credit to MSMEs seems to have picked up in recent months, according to a report, there is actually a steep fall in real (after adjusting for inflation) growth in bank credit to the sector from 13.08 percent in November 2013 to 5.84 percent in September 2018. Additionally, it is feared that the Infrastructure Leasing and Financial Services Ltd. (IL&FS) crisis may further deteriorate the situation.

The above factors -- along with the proximity of the elections and a belated understanding on part of the government that the MSME sector has great potential in creating jobs – are probably behind the recent launch of the 'Support and Outreach Initiative' which promises 59-minute loans to MSMEs. Such positive efforts must continue, both by the government and the RBI, so as to strengthen the sector which contributes about 45 percent of manufacturing output and 40 percent of the total exports in the country.

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