MSME Credit Growth Shows a Slowdown Along With Marginal Deterioration in Asset Quality
Increase observed in Credit Risk build-up in the MSMEs from the Auto Industry
Mumbai, 16 October, 2019: The seventh edition of TransUnion CIBIL- SIDBI MSME Pulse Report shows a marked slowdown in commercial credit growth in the quarter ending Jun‘19. This slowdown comes post a sustained quarter-on-quarter (QoQ) steady growth performance in the commercial credit segment over the last few years. The year-on-year (YOY) commercial credit growth stood at 10.4% in the quarter ending in Jun’19. However, the QoQ comparison indicates a 2.6% decline in credit exposure in the quarter ending Jun’19 over Mar’19. The total on-balance sheet commercial lending exposure in India declined to ₹63.8 Lakh Crores in Jun’19 from ₹65.5 Lakh Crores in Mar’19.
A marginal deterioration in asset quality is also observed with the Non-Performing Assets (NPA) rate surging to 16.1% in Jun’19 from 15.5% in Mar‘19. The overall NPA rate of commercial lending was at 17.2% in Jun’18 so despite the reason increase seen, it is still less than a year ago. NPA rates in Micro and SME segment have remained range bound between 8.5% (Jun’18) to 8.7% (Jun’19) and 10.6% (in both Jun’18 and Jun’19) respectively over the last year. Growth in credit exposure is proportional to gross NPA amount in Micro & SME segment and therefore the NPA rate remains range bound. It is crucial to note that the NPA rate in commercial lending was at a peak of 17.2% in Jun’18.
This edition of MSME Pulse also covers a study on the credit risk build-up in the Auto Industry MSMEs. The study analysed the transition matrix of the Auto Industry MSMEs based on the CIBIL MSME Rank (CMR). CMR is a credit score for MSMEs where the score output rank values range from 1 to 10. CMR predicts early signs of risk. Typically, MSMEs with CMR-1 to CMR-3 are considered lowest risk, CMR-4 to CMR-6 are considered medium risk and CMR-7 to CMR-10 are the highest risk. Transition matrix provides an indicator of portfolio movement across different time periods by observing rank downgrades and magnitude of rank downgrades (1-notch, 2-notch) which are an early indicator of risk. The magnitude of 2-notch downgrades in the transition matrix plotted for auto industry MSMEs is in the range of 14% to 24% during June’18 to June’19, whereas the corresponding numbers were 12% to 15% during June’17 to June’18. This indicates that the good MSMEs in the Auto industry have downgraded more than last year.
Commenting on this finding, the Managing Director and CEO of TransUnion CIBIL, Mr. Satish Pillai, said: “Even though the underlying risk for good MSMEs in the Auto industry may be increasing, these MSMEs still have lower NPA rates than MSMEs from other industries. However, we are noticing accelerated degradation in Auto Industry MSMEs which have been maintaining better CMR. We will continue to carefully monitor these early signs of credit risk build up. With progressive policies and support, we can expect the Auto industry to maintain a strong position in the Indian economy.”
It is important to note that the Auto industry has historically been one of the best performing industries on credit growth and asset quality. While some of the other industries, like Textiles and Construction have seen a rise in the NPA rates, Auto industry continues to be the lowest delinquent industry over the years.
MSME Pulse Seventh Edition Highlights
- Quarterly Commercial credit growth has slowed down: Commercial credit, which has been steadily growing over the past few years, has slowed down in the quarter ending Jun‘19. The year-on-year (YOY) commercial credit growth was at 10.4% in the quarter ending in Jun’19. However, a quarter-on-quarter (QoQ) comparison, suggests that Jun’19 quarter ending exposure levels are lower than Mar’19 quarter ending exposure by 2.6%. The total on-balance sheet commercial lending exposure in India declined to ₹63.8 Lakh Crores in Jun’19 from ₹65.5 Lakh Crores in Mar’19. Micro Loans (less than ₹1 Crore) and SME Loans (₹1 Crore-₹25 Crores) have shown an annual growth of 12% in Jun’19 over Jun’18. While MID (₹25 Crores-₹100 Crores) segment has grown merely at 3.6%, the Large (> ₹100 Crores) segment shows 10.8% annual growth rate.
- Marginal deterioration in asset quality: The NPA rate surged to 16.1% in Jun’19 from 15.5% in Mar‘19. The overall NPA rate of commercial lending was at 17.2% in Jun’18. NPA rates in Micro and SME segment have remained range bound between 8.5% (Jun’18) to 8.7% (Jun’19) and 10.6% (in both Jun’18 and Jun’19) respectively over the last year. Growth in credit exposure is proportional to gross NPA amount in Micro & SME segment and therefore the NPA rate remains range bound. Crucial to note that NPA rate in commercial lending was at a peak of 17.2% in Jun’18.
- NBFCs lose market share: Non-Bank Financial Companies (NBFCs) that were steadily gaining market share across all commercial credit segments, could not maintain the pace in H1-2019. Public Sector Banks have traditionally been the largest lender to the MSME (Micro and SME Segment) sector. In recent years, Private Banks and NBFCs have successfully managed to gain market share from Public Sector Banks on MSME lending. However, in the quarter ending Jun’19, the share of NBFCs has declined for the first time in the last two years. NBFCs have also witnessed an increase in NPA rates in the same period.
- Negative credit growth for NBFCs in H1-2019: NBFC credit outstanding shows a 1% decline over a six month period (Jan- Jun’19) versus same period last year. NBFCs credit growth was at 17.9% last year from Jan’18 to -Jun’18 period. The absolute NPA amount has also increased in the range of 25-28%. The NPA rate for NBFCs has escalated to 5.9% in the quarter ending Jun’19 from 4.4% in Jun’18. Slowdown in credit growth coupled with the ongoing crisis the NBFC industry is facing, has contributed to the decline in asset quality for the segment.
- Rate of default on rise, even though acquisition quality has improved: The number of loan acquisitions in H1-2019 has reduced by 8% over H1-2018. Even though latest acquisitions are better quality, the overall rate of default has increased in Jun’19 as compared to previous quarters. Analysis also reveals that the ratio of total loans sanctioned over total enquiries made by NBFCs has also reduced, indicating a decline in approval rate.
- Building Credit Risk in MSMEs of Auto Industry: The Auto industry has historically been one of the best performing industries. While some of the other industries, like Textiles and Construction have seen a rise in NPA rates, the Auto industry continues to be the lowest delinquent industry. About 45% of MSMEs in the Auto industry belong to CMR-1 to CMR-3 compared to 38% for MSMEs in other industries. Changes in the riskiness of Auto Industry MSMEs is measured using their CMR (CIBIL MSME Rank) transition between Jun’17 and Jun’19. The CMR transition matrix for the Auto industry MSMEs between June’17 to June’18 had a 2-notch downgrade in CMR-1 to CMR-3 between 12% and 15%, this has increased between 14% to 24% in the June’18 to June’19 period. This indicates that the good MSMEs in the Auto industry have downgraded more than last year.
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