Navigating Turbulent Waters: Global Headwinds Gently Push Up NPAs for Export-Oriented MSMEs, Says CRISIL

India's Micro, Small, and Medium Enterprises (MSMEs) are often hailed as the vibrant engine of economic growth, but a recent report from CRISIL Ratings highlights a nuanced and somewhat challenging picture, particularly for those deeply integrated into the global market. While the broader MSME sector is showing signs of resilience and recovery, a subtle but significant headwind is impacting export-oriented businesses, leading to a marginal uptick in their Non-Performing Assets (NPAs).

According to CRISIL's insightful analysis, the NPA ratio for MSMEs primarily focused on exports is projected to increase to 7.8% by March 2024, a slight rise from 7.5% recorded in March 2023.

This uptick is largely attributed to the persistent global economic slowdown, exacerbated by factors such as persistent inflation, tighter monetary policies implemented by advanced economies, and ongoing geopolitical tensions, including the lingering effects of the Russia-Ukraine war. These external pressures have collectively softened global demand, making it harder for Indian exporters to maintain their momentum.

Sectors feeling the brunt of these global shifts include traditional export powerhouses like textiles, gems and jewellery, ready-made garments, engineering goods, and leather products.

Businesses in these segments, which rely heavily on international consumption and trade flows, are finding themselves in a more challenging operating environment, impacting their ability to service debts and contributing to the rise in NPAs.

However, the CRISIL report paints a more optimistic picture for MSMEs catering primarily to the domestic market.

These businesses are expected to demonstrate robust performance, with their NPA ratio actually forecast to decline to 5.7% by March 2024, a notable improvement from 6.3% in March 2023. This domestic resilience is buoyed by several factors, including sustained government spending on infrastructure projects and a steady increase in consumption across various sectors of the Indian economy.

This strong internal demand provides a crucial buffer, allowing domestic-focused MSMEs to thrive even as their export-oriented counterparts face external headwinds.

CRISIL's projections underscore this divergence, anticipating that domestic-linked MSMEs will achieve an impressive revenue growth of 11-12% in the current fiscal year.

In stark contrast, export-linked MSMEs are expected to register a more modest revenue growth of 4-5% over the same period, reflecting the tougher global trade conditions.

Despite the challenges faced by export-oriented units, the overall health of the MSME sector remains on a positive trajectory.

The stronger performance of domestic-focused MSMEs is set to largely offset the slight rise in NPAs from the export sector. Consequently, the aggregate NPA ratio for the entire MSME sector is forecast to improve, decreasing to 6.2% by March 2024 from 6.6% in March 2023. This overall decline underscores the sector's inherent adaptability and the significant role of India's robust internal market.

Furthermore, government interventions, such as the Emergency Credit Line Guarantee Scheme (ECLGS), have played a critical role in providing essential liquidity support to MSMEs, particularly during periods of economic stress like the COVID-19 pandemic.

Such measures have undoubtedly helped cushion the blow and prevent a more widespread deterioration in asset quality.

In conclusion, while a shadow of global economic uncertainty falls on India's export-oriented MSMEs, leading to a careful watch on their asset quality, the broader MSME landscape remains resilient.

The dual-speed recovery, driven by a strong domestic market, highlights the dynamic nature of India's economy and the strategic importance of both internal and external demand drivers for the sustained growth and stability of its vital MSME sector.