MSME have low cyclical NPA, present significant pricing advantage for banks!

With large corporate borrowers contributing a major part of bad loans of commercial banks, the micro, small and medium enterprises could be the silver lining for the lenders, a report jointly prepared by global consultancy firm EY and industry lobby group FICCI has said. The gross non-performing advances (GNPAs) ratio of commercial banks rose from 9.2 per cent in September 2016 to 9.6 per cent in March 2017. The net non-performing advances (NNPAs) ratio has increased marginally from 5.4 per cent in September 2016 to 5.5 per cent in March 2017. Data compiled by the Reserve Bank of India gives an idea of the problem of banks' exposure to large corporate entities. Large borrowers account for 56 per cent of gross advances and 86.5 per cent of GNPAs of banks, whereas, top 100 large exposures account for 15.2 per cent of gross advances. Segmental profiles of NPAs show that the mid corporate and larger SME segments have taken the biggest hit. Data also indicates a significant chunk of accounts that are bad in one bank but not bad in another. A significant part of latent NPAs could slip in the next few quarters. The revenue pool of mid and large corporates will probably stay subdued for the next 4-5 years due to stress in the lending books. Retail advances, on the other hand, continue to grow in medium term (with private sector banks & non-banking finance companies (NBFC) leading the growth path as they target latent consumption demand). However, slight increase in NPAs could impact growth of NBFCs in the longer term. There is a silver lining on the commercial side, the report said. The smaller end of SMEs (loans of less than Rs 1Crore) has been relatively stable over time, in terms of bad loan performance. Credit bureau data also reveals the extent of under penetration in this segment. With over 50 million MSMEs in the country (and over 40 million current accounts), there are only 4.5 million unique borrowers from the formal industry. Read On ..

SME borrowers have been shunned by the formal industry due to lack of reliable audited financial records. However, with significant surrogate digital data (e.g.tax payments) becoming available to banks (further spurred by GST), it is possible to create online credit models that are sufficiently discriminating and low cost.

Competition has been intensifying in the credit market. NBFC outstanding credit reached approximately 10% in the micro segment by June 2017, from 9% in June 2015. As public sector banks are bogged down by bad debt, their market share has receded over the last three years. The SME segment has seen steady capture of market share by new private sector banks, reaching close to 30%.

Corporate advances are expected to continue muted growth in immediate future as delinquency levels peak in next 2 years, followed by uplift in growth to 8-10% levels as NPA stress reduces. The report goes on to say that MSMEs can offer promising upside as share in lending revenues increases from ~20% today to ~24% by FY22 –driven by substitution of informal credit, with reforms like GST & digital payments at point of sale terminals.

Micro and small units are more prone to financial difficulties than large enterprises and corporates. Often absence of timely support at crucial junctures during the operating life cycle of MSMEs leads to their sickness. The Reserve Bank of India has recently said banks need to be sensitive in providing continuous support to viable MSMEs during phases of transient financial difficulties.

At the same time, MSME sector offers a huge opportunity for banks because it is largely under served.

Of the total 5.1 crore MSMEs in India, only 45 lakhs have access to formal credit. This represents significant under-penetration, a coverage gap that is larger than the one in retail. Digital push (restriction on cash) coupled with GST will force "formalization" and hence credit coverage of MSME. The MSME segment also has low cyclical NPA among all commercial banking segments and presents significant pricing advantage leading to better returns. "Addressing the potential in MSME effectively can help deliver disproportionate growth for commercial lenders. MSME segment, if targeted and serviced appropriately, can grow to have substantial share of Indian bank's commercial balance sheets in the next 3-4 years,” the report said.

- TradeBriefs Bureau - 

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