Tariff war puts Rs 21,800 cr in MSME, mid-corporate loans at risk: Report
India Ratings warns that Rs 21,800 crore in loans to high-risk MSMEs and mid-corporates are threatened by worsening operating conditions due to the escalating tariff war. MSMEs, particularly in sectors like chemicals and textiles, face growing vulnerability. Mid-corporates possess a stronger financial buffer, but a slowdown in demand could severely impact MSMEs.
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Loans worth Rs 21,800 crore borrowed by high-risk MSMEs and mid-corporates could be at risk as operating conditions continue to worsen due to the escalating tariff war, according to domestic rating agency India Ratings. The agency predicts that MSMEs will face growing vulnerability, particularly those in sectors like chemicals, textiles, steel, and industrial machinery, which are negatively impacted by the ongoing trade tensions.A study of 1,898 listed and unlisted MSMEs, along with 1,055 mid-sized corporations, indicates that mid-corporates have a stronger financial buffer against unexpected financial shocks. India Ratings attributes this resilience to their better financial metrics compared to MSMEs.Of the 1,898 MSMEs, 6% are classified as high-risk, with an interest coverage ratio of less than 1.1 times and leverage exceeding 5 times. These MSMEs have total outstanding debt of around Rs 8,100 crore, accounting for 16% of the total debt held by the MSMEs tracked by India Ratings.Meanwhile, 5% of mid-corporates fall into the high-risk category, with total outstanding debt of around Rs 13,700 crore as of FY24, comprising 11% of the total debt of the 1,055 mid-sized corporates tracked by the agency.The rating agency's analysis reveals that, as of March 31, 2024, 23% of MSMEs remain stressed, with an interest coverage ratio of less than 1.1 times, compared to only 11% for mid-corporates.'Capex intensity is usually low among MSMEs, as they struggle more with working capital issues and require adequate finance at competitive rates,' said Neermoy Shah, Associate Director of Emerging Corporates at India Ratings.While a slowdown in demand could severely impact MSMEs, a reduction in interest rates and improved liquidity could provide some relief. Capital expenditure (Capex) by MSMEs has picked up modestly post-COVID but still lags behind historical levels. The agency notes that the lack of improvement in MSMEs' coverage ratios and the increasing number of loss-making MSMEs underline their susceptibility to external shocks.Externally, sluggish consumption trends and the global economic slowdown, particularly in the wake of the intensified tariff war, are likely to exacerbate the operating and credit challenges faced by MSMEs, India Ratings cautioned.Of the 1,898 MSMEs studied, 50% are operating with a return on equity (ROE) of less than 5%, reflecting subdued capex activity over the past decade. Government initiatives like the Interest Subvention Scheme and Credit Linked Capital Subsidy Scheme have only slightly boosted capex over the last three years.'Any potential slowdown in both global and domestic demand, driven by the escalation of tariff war 2.0, remains a key deterrent to further capex by MSMEs,' the rating agency concluded.
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