MSME sector growth to be muted due to demonetisation:Crisil

Demonetisation will pull down growth of the MSME sector in the current fiscal, even as it engineers a substantial shift away from cash transactions for nearly half of their clients, a nationwide survey by Crisil has revealed.

The micro, small and medium enterprises (MSMEs) affected the most belong to traditional sectors with high reliance on cash transactions such as textiles, agricultural products, steel, consumer durables, construction and automobiles.

Unorganised players (less than 10 employees) are expected to struggle more than their organised counterparts, with 37 percent of them likely to report negative revenue growth in the second half compared with a quarter of organised players.

As many as 41 percent of MSMEs said their clients have shifted to cheque or electronic payment since demonetisation.

However, the gain has not come without its share of pain.

Demonetisation, said those surveyed, will lead to lower growth, mostly on account of its impact on day-to-day operations.

"Typically, MSMEs perform better in the second half (October-March), which means annual growth will be muted," the survey by the rating agency pointed out.

Yet, despite the hiccups, as many as 41 percent of those surveyed expect to do better in the second half of this fiscal, while 29 percent expect de-growth.

The cash ban has impacted business operations, however, demonetisation has spurred a major change in the way MSMEs conduct business.

Most of them see only a short-term impact of demonetisation, and more than three-fourths believe it will be business as usual by June 2017, the survey found.

Demonetisation has also impacted the liquidity of MSMEs.

At least 9 percent of those surveyed, accounting for 6 percent of outstanding debt of the sample, said they will face issues in debt repayment. Most of these are micro enterprises with revenues below Rs 2 crore.

"Every fifth MSME surveyed planned to raise additional funding in the coming months, half of it for working capital.

Interestingly, with unsecured loans from friends and associates drying up, 3 out of 4 respondents plan to approach banks for loans, while the rest will rely on internal accrual.

That opens up a massive opportunity to banks currently awash in liquidity," Manish Jaiswal, Head-SME Ratings, Crisil said.

Nearly half of the MSMEs with annual turnover less than Rs 2 crore reported a greater shift towards less cash, compared with a third of those with revenue over Rs 25 crore.