Showing up the effects of the second wave of Covid, the consumer credit aka retail and loans to MSMEs could pose higher slippage risk for lenders in the coming quarters.


The financial stability report by Reserve Bank of India said going forward, close monitoring on asset quality of MSME and retail portfolios of banks is warranted.





Consumer credit deteriorated after the loan moratorium programme came to an end in September 2020. Customer risk distribution of the credit active population underwent a marginal shift towards the high-risk segment in January 2021 relative to January 2020.


In terms of credit risk migration, even low risk tiers are showing downward momentum. Consumer credit portfolios of private banks and finance firms including housing finance companies are seeing incipient signs of stress, FSR said.


The second wave has sharply affected credit demand, with a steep fall in inquiries across product categories in April 2021. The overall demand for consumer credit, as reflected in inquiry volumes, had stabilised in (Q4FY21) after a sharp rebound during the festive season in (Q3FY21). The first Covid wave receded in the third quarter.


Referring to exposure to micro, small and medium size units (MSMEs), the report pointed out stressed entities as group have the elevated level of debt. The implications of business disruptions following the resurgence of the pandemic could be significant.



Since 2019, weakness in the MSME portfolio of banks and finance companies has drawn regulatory attention. The Reserve Bank permitted restructuring of temporarily impaired MSME loans (of size upto ’25 crore) under three schemes.


While Public sector Banks (PSBs) have actively resorted to restructuring under all the schemes, participation by PVBs was significant only in the COVID-19 restructuring scheme offered in August 2020. Despite the restructuring, however, stress in the MSME portfolio of PSBs remains high, the report said.


The government guaranteed credit scheme to eligible categories boosted the disbursements. The net credit flow to stressed MSMEs during March 2020-February 2021 rose to Rs 50,535 crore with the shares of PSBs and private banks at 54 per cent and 35 per cent, respectively. The transition from low and medium risk MSME borrowers, year-on-year basis, to the high-risk segment was noteworthy.


FSR said the banking sector will be required to specifically guard against adverse selection bias while being alive to the credit demand from productive and viable sectors.


In the most optimistic scenario, the impact of the second wave should be contained within the first quarter of the year. The frictional inflation pressures work their way out over the first half of the year, it added.

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