Banks are redrawing their strategies on funding micro, small and medium enterprises (MSMEs), expecting the transition to the goods and services tax (GST) will improve their credit profiles and enhance their borrowing capacity. The strategies mainly comprise launching new products and hand-holding existing MSME borrowers in improving cash flow prediction models and GST compliance. MSMEs are starved of capital because of limited access to bank credit. One of the key reasons for this has been lack of documentation and wherewithal to predict future cash flows, maintain accounting, and comply with taxation. Since the GST implementation, banks have seen a rise in demand for working capital from MSMEs. The SME loan book growth of banks is expected to be in the range of 5-7% annually in the next 2-3 years. On the other hand, non-banking financial companies would increase their SME lending book at a much faster rate of 20-25%.MSME loans have been de-growing for the past few months as the sector faced issues owing to demonetization and later the transition to GST. However, the de-growth, which had peaked in the months following demonetization, has been showing signs of stabilizing.

(Live Mint)