Commercial Credit Growth Back to Pre-pandemic Levels, Signals MSME Pulse Report

• ECLGS has boosted MSME credit supply. Majority of originations are towards ETB (existing-to-bank) segment and Non-Metro locations
• Higher CIBIL Rank downgrades are seen in sectors dependent on consumer discretionary spends and the Micro loans segment
• 100% credit guarantee scheme has increased approval rates, which are now higher than pre-COVID-19 levels

Mumbai, 18 February, 2021: Findings from the latest edition of the TransUnion CIBIL-SIDBI MSME Pulse Report indicate that under the aegis of the Government’s Emergency Credit Line Guarantee Scheme (ECLGS), commercial credit enquiries surged 58% year-on-year (YoY) in June’20 and stabilised toward the end of the year, up around 13% (YoY) as of Dec’20, which is similar to pre-COVID-19 growth levels. The total on-balance-sheet commercial lending exposure in India stood at ₹71.25 lakh crores in Sep’20, clocking a growth rate of 2.1% YoY. For the MSME segment, credit exposure stood at ₹19.09 lakh crores as of Sep’20, showing YoY growth of 5.7%. This credit growth is observed across all the sub-segments of MSME lending.

MSME loan originations show a v-shaped recovery with the ETB segment being the primary beneficiary

Report analysis indicates that MSME loan originations growth during Jan’20 and Feb’20 was over 30% YoY. However, this growth rate reduced significantly in Mar’20 and Apr’20 consequent to the COVID-19 lockdowns. With the launch of the ECLGS, loan originations surged in Jun’20, growing at 115% over Jun’19 and continued to be high and close to pre-covid-19 levels for the remainder of the year. This strong rebound in MSME loan originations was driven by the existing-to-bank (ETB) segment. Borrowers who have an existing commercial credit relationship with the lender are defined as ETB. This is primarily due to the design of the ECLGS, where the guidelines mandate lenders to extend 20% of credit to existing borrowers. Consequently, the YoY growth in ETB loan originations crossed 200% in the first month of the ECLGS infusion. Since then, this spike has tapered off, but ETB originations continue to stay buoyant. On the other hand, new-to-bank (NTB) originations are finding it hard to recover to pre-COVID-19 levels.

Speaking on the findings of the MSME Pulse, the MD & CEO of TransUnion CIBIL, Mr. Rajesh Kumar, said: “The resurgence in MSME credit growth, which is back at pre-pandemic levels, is a very promising indicator of economic recovery in our markets. Public Sector Banks (PSB) are the leading drivers of this resurgence as they have astutely wielded data analytics and credit information solutions to swiftly comply with the ECLGS guidelines and dexterously implement lending to MSMEs. Recent budget announcement by the honorable finance minister have doubled the contribution to the MSME sector over last year, which shall further provide much needed financial support to the sector. TransUnion CIBIL is committed to work with all the ecosystem players including the government, the regulator, lenders and last-mile MSMEs to support sustainable growth of the sector”.

Non-metro geographies are leading the rebound in MSME credit

On studying trends at a geographic level, a significant increase is observed in the growth of loan originations in the Urban, Semi-Urban and Rural regions which were subjected to less stringent and shorter lockdowns .Metro cities which experienced stricter lockdowns showed muted growth. It is observed that MSME credit disbursals in metro cities were most impacted during April and May 2020, however these have bounced back in June 2020 after the ECLGS implementation. The ECLGS infusion has been pivotal in driving financial inclusion across geographies, with non-metro locations leading the growth in loan originations. Metro region disbursals have shown slight improvement but Y-o-Y growth is still lower during the Aug’20 and Sep’20 period as compared with the YoY disbursal growth in Jan’20 and Feb’20.

Industry sectors that are dependent on consumer discretionary spends show higher downgrades

The report covers an analysis based on the CIBIL Rank, which is an indicator of the credit risk associated with MSMEs. CMR assigns a rank to the MSME based on its credit history data on a scale of 1-10, CMR 1 being the best possible rank and CMR 10 being the riskiest rank for MSMEs. In this edition of MSME Pulse, CMR transition is monitored for borrowers over a one-year period starting Sep’19 to Sep’20 for rank buckets of CMR 1-3, CMR 4-5, CMR 6-7 and CMR 8-10. It is observed that 36% of borrowers who were in CMR 1-3 bucket in Sep’19 downgraded to lower rank buckets by Sep’20 and 15% of the borrowers who were CMR 4-5 in Sep’19 upgraded to a higher rank bucket by Sep’20.

Further study on CMR downgrades across sectors reveals that rank deterioration is relatively lower for MSMEs that are focused on consumer staples or necessity sectors like auto, infrastructure and FMCG and higher for MSMEs where consumer discretionary spends are highest - sectors like hospitality, commercial real estate and textiles.

Looking across segments, it is observed that the Small and Medium segments have been least impacted due to the economic slowdown as these have seen the lowest rise in the CMR downgrade compared to the Micro segment MSMEs. For the period starting Sep’19 to Sep’20, CMR downgrade for Micro segment borrowers in the CMR 1-3 bucket was 36% compared to 24% in the previous time period (Sep’18 to Sep’19).

Commenting on the findings of the report, Mr. V. Satya Venkata Rao, Deputy Managing Director, SIDBI said, “Credit growth to MSME sector has witnessed sharp rebound and registered 5.7% YoY growth in Sep’20, on account of large policy stimulus by Government including ECLGS. Public sector banks have been the front runners in supporting the MSMEs during pandemic and as the economic activity has rebounded, Private Banks and NBFCs are also witnessing spurt in credit demand. As we move ahead on path of growth, we need to carefully monitor the risk build-up signs, especially, in Micro segment which is witnessing comparatively higher CMR downgrades.”

MSME credit profile dynamics changing rapidly post pandemic

MSME Pulse observed a definite shift in the credit profile dynamics of MSMEs – a reduction in average loan size, spurred by the 20% cap of the ECLGS, was observed amongst both existing and new borrowers. The ETB segment’s average loan size dropped from over ₹ 40 lacs in Jan’20 to under ₹ 10 lacs in Sep’20. This drop is broadly in line with the 20% cap of ECLGS. The NTB segment average loan sizes also reduced from ₹ 18 lacs in Jan’20 to just over ₹ 10 lacs in Sep’20.

Another clear shift was that approval rates increased across all lenders with the backing of the 100% credit guarantee of the ECLGS primarily lead by PSBs. Even though private banks and NBFCs are gradually returning back to pre-COVID-19 levels, PSBs continue to have over twice the approval rates of their pre-COVID-19 levels. The biggest beneficiaries of the increased approval rates are high-risk segment MSMEs with CMR 7-10, which had the highest rise in approval rates relative to their pre-covid-19 levels. Important to note that before the COVID-19 pandemic, PSBs had sub 20% and private banks had about 50% YoY growth in originations during Jan-Feb’20 period. Post pandemic, since Apr’20 onwards, PSBs have accelerated originations and taken the pole position in the month-on-month MSME loans originations.

“While Public Sector Banks have taken a benchmark lead in MSME loan originations post the ECLGS implementation, Private Bank and Non-Bank Financial Companies are closing the gap rapidly and have scaled originations growth significantly over the recent months. The credit industry has a huge role to play in not only the resurgence of our economy by driving credit infusion, but most importantly safeguarding its stability by carefully monitoring risks and controlling those in a timely and efficient manner,” concluded Rajesh.

MSME Pulse- Edition XI– Highlights

• Commercial credit enquiries have bounced back and are maintaining pre-COVID-19 levels, indicating a resurgence in credit demand: The year-on-year (YoY) growth in commercial credit enquiries dropped 60% in Apr’20. However with the government’s Atmanirbhar Bharat Initiative on Emergency Credit Line Guarantee Scheme (ECLGS), commercial credit enquiries growth surged 58% YoY in June’20 and and stabilised at 13% YoY growth for Dec’20, which is similar to the growth rate of pre-COVID-19 levels.
• ECLGS has boosted MSME credit supply, however the majority of originations are towards the ETB (existing-to-bank) segment: Given the nature of ECLGS, lending towards ETB MSMEs has accelerated, which has led to a deeper penetration of credit into the ETB segment. In Sep’20, 30% of MSMEs which had an existing live loan as of Mar’20, got another line of credit, compared to 7% for a similar time frame during 2019.
• MSME loan originations rebound higher for non-metro locations than metro cities: Non-metro locations were subjected to less stringent and shorter lockdowns than metro cities. This is reflected in MSME loan originations of non-metro locations which exhibited YoY growth of 157% in Jun’20 and 20% in Sep’20. In comparison, metro locations exhibited lower YoY growth in originations at 76% in Jun’20 and 12% in Sep’20.
• Public Sector Banks (PSB) have emerged leaders in MSME lending, followed by Private Banks: PSBs scaled YoY growth in originations stood at 30% in Sep’20 – nearly double their pre-COVID-19 levels of 16% YoY growth in Feb’20. For Private Banks the YoY originations growth stood at 16% in Sep’20. PSBs have been the forerunners in MSME lending, a lead they have maintained since Apr’20. However, recent enquiry trends from Dec’20 and Jan’21 period show a reversal of this trend, as Private Banks have resumed MSME lending and are closing the gap rapidly.
• 100% credit guarantee scheme has increased approval rates to higher than pre-COVID-19 levels: Approval rates increased by nearly 1.5 times in Jun’20 when compared with pre-COVID-19 levels. The rise in approval rates is most significant for PSBs which have grown around two times as compared to pre-COVID-19 levels. The highest beneficiaries of the rise in approval rates are high risk MSMEs with CIBIL MSME Rank (CMR) of 7-10 signalling caution and the need for regular monitoring of these portfolios.
• Higher CMR downgrades are seen in sectors with higher consumer discretionary spends and Micro loans segment: Pandemic-related economic activity has led to a deterioration in borrowers’ credit profile, leading to higher CMR downgrades for Sep’19-Sep’20 period compared with the same period the year before. However, the downgrades are much more prononunced for higher consumer discretion spend sectors compared to consumer staple spend sectors largely in the Micro segment.
• Default rates for Sep’20 are stable at 12.1% due to acceleration in credit supply: Non-Performing Asset (NPA) rates for the MSME segment for Sep’20 stand at 12.1%, which is similar to that of last year (12.5% in Sep’19) but lower than the last quarter (13.0% in Jun’20). The high credit infusion into the MSME segment since Jun’20 onwards has provided a strong denominator to NPA rates. However, NPA rates may be subject to change as the guidelines emerge.
• Outstanding credit balances growth rate show a v-shaped recovery trend: The lockdown during the last 10 days of Mar’20, which is traditionally the most credit active period in India, hampered MSME credit activity, leading to a drop in outstanding credit balances growth of -3.9% YOY in Mar’20. Followed by ECLGS, where credit activity bounced back again and in Sep’20 outstanding credit balances increased by 5.7% YOY.