MSME credit continues to have lowest rate of default in commercial lending

Structurally stronger MSMEs most eligible for financial assistance for refueling growth

Mumbai, 7th May, 2020: The latest edition of the TransUnion CIBIL-SIDBI MSME Pulse Report reveals that the default rates across all the MSME segments continue to be lower than those of the large corporates. In Jan’20 the non-performing assets (NPA) rate for large corporates was at 19.7% while the NPA rate in the MSME segment stood at 12.5%.The total on-balance sheet commercial lending exposure in India stood at ₹64.45 lakh crores as of Jan’20 of which the MSME segment holds ₹17.75 lakh crores credit exposure. Within the MSME segment, Micro segment borrowers (aggregate credit exposure <1cr) observed robust fresh credit disbursals worth ₹92,262 crores in CY 2019.

Finding and funding the good MSMEs

This edition of MSME Pulse covers a study conducted on the assessment of the structural strength of MSMEs and classifies entities that are positioned strong to tide over the pandemic situation. Structurally stronger MSMEs are expected to be in a position of low leverage and high liquidity prior to the pandemic situation. CIBIL MSME Rank (CMR) and credit utilization of MSMEs are used to identify and map the position of MSMEs. This hypothesis is back-tested under two scenarios – the first being the Goods and Services Tax (GST) implementation period starting Jul’17 while the second covers the period starting Jul’18 which includes NBFC liquidity crunch and MSME credit growth slow down post Mar’19. By mapping the CMR and credit utilization of MSMEs during these two scenarios, we are able to understand their position before they entered previous disruptive phases and track their performance in the subsequent 12 months. This can the help predict the ability of entities to continue to remain stable and weather the current pandemic situation.

Speaking on the insights from this study, the Managing Director and CEO of TransUnion CIBIL, Mr. Rajesh Kumar said, “The findings of the study make the case that structurally strong MSMEs are better positioned to survive the current pandemic situation and emerge stable. These MSMEs are the most eligible to receive financial assistance from credit institutions. There is an opportunity here for banks and financial institutions to identify and fund these entities and build a healthy portfolio. Such targeted interventions can help refuel the economy through these unprecedented times while ensuring that portfolio risk is under control.”

“TransUnion CIBIL is committed to supporting the credit sector, the regulator and the government with rich insights and solutions towards the formulation of judicious policies to drive access to finance for MSMEs, while ensuring the stability of credit portfolios and navigating the economy back on the growth track,” added Rajesh.

While the impact of the lockdown may be more pronounced than that of the earlier events simulated in the analysis, the core essence of the simulation study highlights the attributes to identify stronger MSMEs and their lower likelihood of getting impacted by the financial pressures of the pandemic situation. The findings of this study on the position of MSMEs prior to current lockdown, conclude that almost two out of three MSMEs entered this lockdown with structurally strong positions of which about half are very strongly positioned.

Micro segment emerges as a promising growth driver

Findings from this edition of MSME pulse indicate that on-balance sheet exposure across most sub-segments of MSME lending has reduced in the last few quarters, however micro segment (aggregate credit exposure <1cr) is emerging with fresh disbursals to the tune of ₹92.3K crores made to this segment in the calendar year 2019.

Public Sector Banks (PSBs) and Private Banks have roughly equal share in new credit disbursed to the Micro segment borrowers. However, when looking at granular segmentation then the Very Small segment (aggregate exposure <10L) is dominated by PSBs and the Micro-2 (aggregate exposure 50L to 1CR) is dominated by Private Banks.

Fresh disbursals in the Micro segment are also observed across states. The top 15 states account for over 80% of total credit disbursals in 2019, by amount. Maharashtra and Tamil Nadu together account for over 1/5th of the fresh disbursals. The highest rate growth in fresh disbursals in 2019 over 2018 was observed for Rajasthan, while lowest growth happened in Odisha, among the top 15 states.

The NPA rate for the Micro segment at 9% has been lower than the Small and Medium segments which was at 11%. NPA rates are highest for medium sized MSMEs at 18% across all lenders.

The Micro segment can be the next growth driver for the economy and credit institutions must capitalize on this opportunity by identifying the Micro segment entities that have stood strong through the past disruptions and fund them during these times. Banks and credit institutions can play a pivotal role in fortifying the MSME sector and revitalize the economy by making astute lending and policy decisions based on sectoral data insights,” observed Mr. Mohammad Mustafa, Chairman and Managing Director, SIDBI.

MSME Pulse Ninth Edition Highlights

MSME credit continues to have lowest default rate in commercial lending: The default rates across all MSME segments continue to be lower than large corporate NPA rates. The NPA rates for the Micro segment MSMEs have remained stable. Within the Micro loans[1] segment <10L ticket size loans have observed a reduction in default rates. However, Small and Medium segment NPA rates continue to increase for last three quarters consecutively.

Public Sector Banks gain market share in MSME lending: Public Sector Banks (PSBs) had been losing market share continuously over a long period of time. A surge in both NBFCs and Private Banks market share had been the reason for the PSB segment losing its share. However, in the quarter ending Dec’19, PSBs have gained market share in MSME lending, for the first time in the past few years. As of Dec’19, PSB market share stood at 49.8% of the overall MSME lending book, with the highest market share in the Micro segment at 59.2%.

Micro segment showed fresh credit disbursals worth ₹92,262 crores in 2019: Lenders disbursed ₹92,262 crores worth of fresh credit towards the Micro segment. While Private Banks and public sector banks have roughly similar share on fresh credit disbursed in the Micro segment, the growth trends differ significantly when analysed at a granular sub-segment level.

Maharashtra had highest share; Rajasthan clocked fastest growth on fresh credit disbursals in the Micro segment for 2019: Maharashtra, Tamil Nadu and Andhra Pradesh cum Telangana grabbed the largest share of fresh disbursals in the Micro loans segment. While Rajasthan, Delhi and Madhya Pradesh showed fastest growth in fresh disbursals in the Micro segment. However, the trends differ when analyzed by lender category – for instance, the Micro segment credit landscape in Uttar Pradesh is dominated by Public Sector Banks; in Tamil Nadu by Private Banks and in Rajasthan by Non-Banking Financial Companies (NBFCs).

Structurally stronger MSMEs are likely to be least impacted in the lockdown: The lockdown impact on any entity will depend on multiple factors; two of the most critical factors being credit leverage and the liquidity position of the entity. Deeper insights can be gained on these two factors at an entity level by studying the CMR and utilization rates of these entities. By simulating these two elements on past events like GST implementation, IL&FS crisis, and rise in NPA rates, we have observed and concluded that entities with low leverage and higher liquidity had lowest default rates during and post these events.

While the impact of the lockdown may be more pronounced than that of the earlier events, but the core essence of the simulation study highlights that ‘structurally stronger MSMEs will be the least impacted’. The findings of the study on the structural position of MSMEs prior to the lockdown, concludes that almost two out of three MSMEs are well placed to weather this lockdown and 30% are very strongly positioned.

Commercial credit exposure for Dec’19 stood at ₹64.04 lakh crores with YoY expansion at 3.9%: The total on-balance sheet commercial lending exposure in India stands at 64.45 lakh crores as of Jan’20, which was ₹64.04 lakh crores in Dec’19. Of this, the MSME segment represents 17.75 lakh crores credit exposure as of Jan’20. It is important to note that the MSME segment has observed a lowering of credit exposure across most sub-segments of MSME lending in the last few quarters. The large corporates segment is at 46.7 lakh crores credit exposure and has observed a YoY expansion of 6.3%.

Utilization rates of working capital limits for MSMEs have been reducing: Reducing utilization levels of working capital limits in MSMEs has been one of the reasons for lowering of credit exposure for the segment. The drop in utilization rates for Private Banks has accelerated rapidly while that of PSBs has been milder.



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