MSME Credit Disbursement Accelerates While Credit Quality Stays Stable

Findings from the latest edition of the TransUnion CIBIL-SIDBI MSME Pulse Report indicate that credit disbursement to the MSME sector has doubled compared to pre-pandemic levels across segments, indicating that lenders are in a position to support increasing credit demand. Overall, MSME credit exposure stood at ₹23.12 lakh crores as of March ’22, reflecting a year-on-year (YoY) growth rate of 6.3%. The total number of live MSME borrowers increased by 6% YoY in March 2022.

Credit demand and supply continued to remain buoyant

Report analysis shows that MSME credit demand has been progressively increasing after the second wave of the pandemic, with current demand clocking ≈1.6X that of the pre-COVID phase. Commercial credit inquiries have picked up in the last year owing to the recovery in economic and business activity. Public Sector Banks (PSBs) have seen a 1.6X inquiry growth while Private Banks (PVTs) witnessed 1.7X growth as compared to that of the pre-COVID phase. Non-Banking Financial Companies (NBFCs) showed recovery trends following the second pandemic wave in the first quarter of FY22. NBFCs showed a 1.4X growth in inquiries as compared to that of the pre-COVID phase.

Speaking on the findings of this edition of MSME Pulse, Mr. Sivasubramanian Ramann, Chairman and Managing Director, SIDBI, said: “Insights on credit demand and supply from this edition of MSME Pulse verify that timely liquidity infusion through the ECLGS has strengthened the MSME sector towards resurgence. Lenders have successfully executed the ECLGS and provided timely support to all the MSME segments. With this infusion, MSMEs can scale business growth rapidly.”

Adding to this, the Managing Director & CEO of TransUnion CIBIL, Mr. Rajesh Kumar, said: “The increase in MSME credit demand across segments bodes well for economic resurgence. By catering to this demand astutely, lenders can grow their portfolios while contributing to financial inclusion as well as GDP growth. The resurgence can be strengthened further by facilitating speedier and more seamless triangulation of multiple sources of information for creating an orthogonal view of MSMEs. Fortified information infrastructure that provides an enriched view of MSMEs can build the bedrock required for scaling sustainable and long-term evolution of India’s MSME sector.”

Exhibit 1. Mapping India’s MSME credit through the MSME Pulse lens

The rise in demand has been well supported by lenders with total MSME credit disbursement clocking 43% YoY growth in FY22-Q4. Compared to the pre-COVID phase (FY20-Q4), disbursement across all three MSME segments have almost doubled in FY22-Q4. Disbursements in the micro, small and medium segment increased YoY by 19%, 33% and 38%, respectively from FY21 to FY22.

Analysis of the NPA rate indicates a marginal uptick with the overall level of MSME NPAs at 12.8% in March ’22. Important to note that the NPA levels reflect a higher percentage because of historical accumulation. Ageing analysis of NPA highlights that of the total balances in 90+ days-past-due (DPD), ≈ 70% pertain to accounts originated till March 2017. NPAs in the MSME segment have shown an upward trend since March ’21. Until Q3 of FY21, the micro segment (~9% in FY20-Q4) had a similar NPA rate to the small segment (~9% in FY20-Q4) of MSMEs. However, this trend has now flipped indicating that COVID has impacted the micro segment the most. Lender type analysis reveals that the NPA rate of Private Banks (5.6% in FY22-Q4) remained stable since FY21-Q3. Public Sector Banks (20.8% in FY22-Q4) and NBFCs (9.6%) however have exhibited an increase in the NPA rate after Q3 of FY21.  The NPA rate for the NBFC segment continued to grow at a steady rate over the last 2 years.

Public Sector Banks reported maximum restructured accounts

This edition of MSME Pulse covers a study on restructured loan accounts which have been reported to the TransUnion CIBIL Commercial Bureau with reference to the Reserve Bank of India’s notification* on reporting of restructured accounts due to the COVID pandemic. Following this mandate, lenders have reported restructured loans under the “Restructured due to COVID-19” tag. Study insights based on the restructured accounts show that as of March ’22, 2.7 Lakh credit accounts have been tagged as restructured due to COVID-19 in the MSME segment (aggregate outstanding of less than 50Cr) which constitutes around 2.3% of the total live accounts reported in the same time period. From a balance perspective this constitutes INR 0.35 lakh crore which is around 1.5% of total MSME balances outstanding as of March ’22.

Bank type analysis of restructured loans indicated that Public Sector Banks reported the largest number of restructured accounts to the TransUnion CIBIL Commercial Bureau followed by Private Banks and NBFCs.

CIBIL Rank (CMR) based analysis further shows that High Risk Entities (CMR-7 to CMR-10) constitute 57% of restructuring followed by medium risk (CMR-4 to CMR-6) at 28% entities and low risk entities (CMR-1 to CMR-3) at 16%. This clear rank ordering demonstrates that CIBIL MSME Rank (CMR) is able to identify stressed portfolio and enable lenders to take timely corrective action from a risk management perspective.

Exhibit 2: Restructuring by Risk Tier

With reference to the type of loans, it was observed that term loans are restructured more than working capital loans. This trend bodes well and implies that MSMEs are prudently managing their liquidity through cash credit (CC) or overdraft loans. Micro and small entities constitute 76% of the restructured accounts compared to larger sized MSME entities which is also driven by the high proportion of such loans in the bureau.

“Small and medium businesses form the backbone of India’s economic engine and are the catalysts for sustainable economic growth. It is therefore vital to support them with a conducive ecosystem for accessing affordable financial opportunities easily and quickly. By collaborating with regulators, credit institutions and the wider industry to create meaningful insights and digitization-led framework, we are working hard to enable MSMEs to have greater access to financial opportunities seamlessly while helping foster financial inclusion,” concludes Rajesh.