Higher credit absorption works, manufacturing loses out heavily.
A hardening demand graph for loans from smaller firms in the service sector is proving to be the only bright spot in the beleaguered credit environment for small businesses. Bankers hope to latch on to this segment in an effort to make up for the lost ground on the demand front in manufacturing-related small businesses.
Bankers say that in the last few months, they are seeing robust demand from smaller businesses in the service sector such as restaurants, laundry services, repair centres and so on. Some of this is due to an increased focus on the sector while the rest of it can be attributed to stiffer resistance to the economic weakness.
“The trend we have seen is that there is increased credit absorption in this sector. There is a good buoyancy seen here which may not have been seen a year back,” said a senior general manager with the State Bank of India.
The usual break-up of credit flow between smaller businesses in manufacturing and service sectors reads 70:30. Higher loan requirement comes in the form of machinery purchases, expansion costs and longer gestation period for the manufacturing sector. But this ratio is slowly changing, with demand from the small service sector outshining that of manufacturing units.
With the economy taking a battering due to negative growth in the manufacturing sector, a sustained growth in the service sector seems to be providing much comfort to lenders in this space. The macro numbers, however, continue to disappoint. GDP growth for the first quarter came in at a mere 4.4%, manufacturing output dropped 1.2% while service sector growth stayed steadfast at 6.6%.
“Mostly, whatever growth is taking place is taking place in the service sector only,” said a senior banker handling the SME portfolio with Central Bank of India. Credit deployment to small- and micro-sized enterprises has grown a mere 2.3% this financial year, according to the latest Reserve Bank of India data.
Small businesses in the manufacturing sector seem to be content with going for only working capital loans, faced with realisation issues from large corporate and struggling to make payments. Demand for term loans needed for expansion has reached almost nil.
“The government has suggested to promote service sector. Bankers are also finding new avenues to deploy funds,” said JK Rajput, deputy general manager for micro-, small- and medium-sized enterprises at Bank of Baroda. “Last year manufacturing saw a slowdown. So, now the strategy is to look at the service sector.”
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