Kare koi, bhare koi... MSMEs pay for bad loans of large corporates
Updated: May 24, 2019
India now has the dubious distinction of having the worst bad loan ratio among major economies.
However, we can try and look at the brighter side of things -
Much of the bad loan recognition is done, and the worst is behind us, bad loans are declining.
With the new bankruptcy law, the creditor-borrower relationship has been reset on fairer grounds now. While the bad loans situation is on the mend, we must look at its impact on different segments of the economy.
Estimates suggest that large corporates constitute about 80% of the bad loan problem. And unfortunately, the bad loans of large corporates hit MSMEs much harder because of 3 aspects:
1) Large corporate NPAs mean bank balance sheets are strained, and they are not able to lend to MSMEs who desperately need working capital.
2) Large corporates under stress delay payments to MSME suppliers (because they have the power, despite the MSME law).
3) MSMEs don't have alternate avenues for financing (say capital markets) and end up borrowing informal markets at high interest rates.