Credit growth to MSMEs slows to 5% in Q2FY20; asset quality deteriorates

The overall credit growth to micro, small and medium enterprise (MSME) segment slowed further in the second quarter (2QFY20) to about 5 per cent year-on-year (yoy), as per a report by Kotak Securities Ltd. Simultaneously, asset quality in these loans continued to deteriorate for a second consecutive quarter.

The decline in credit growth to MSMEs from about 20-25 per cent a year ago was led by a slowdown across all ticket sizes, although the larger ticket-size segments (Rs 1 crore-50 crore ) have seen a steeper deceleration

The loan book has declined sequentially for two consecutive quarters (down about 3 per cent the first half -- H1 -- of FY20), the report said. MSME accounted for about 28 per cent of overall commercial lending in India as of 2QFY20 with on-balance sheet loans outstanding of about Rs 18.3 lakh crore.

PSBs lose market share

Public sector banks (PSBs), which have been the dominant lenders in the segment, have been losing market share to non-banking finance companies (NBFCs) and private sector banks (market share down about 900 basis points to since 2QFY18 to about 48 per cent), said the report put together by analysts' M B Mahesh, Nischint Chawathe, Venkat Madasu and Ashlesh Sonje. One basis point equals one-hunderdth of a percentage point.

While both private sector banks and NBFCs had been the beneficiaries, NBFCs had ceded some of the gains post Q3 (third quarter) FY19 (market share about 130 basis points to 12.8 per cent) as the liquidity situation worsened. However, the market share of NBFCs saw a slight uptick in 2QFY20 by about 20 basis points, after three quarters of declines, the report said.

Private sector banks continued to gain in the segment with their market share up about 250 bps yoy/about 50 bps quarter-on-quarter (qoq) to about 39 per cent as of 2QFY20.

The report underscored that with PSBs coming back into the market driven by the government’s push, the market share decline will likely be arrested in the coming quarters.

Asset quality continues to worsen

Non-performing loan (NPL) ratio in overall MSME credit increased about 40 bps qoq to 12.2 per cent in 2QFY20 (up about 110 bps in 1HFY20). PSBs and NBFCs have seen a steeper increase in NPLs compared to PvBs, the report said.

The authors of the report noted that while NPL ratio for private banks has been stable at about 3-4 per cent in the last eight quarters, PSBs (about 220 bps increase to about 18.6 per cent) and NBFCs (about 70 bps increase to about 6.6 per cent) have seen marked deterioration in their MSME portfolio.

Most of the increase for NBFCs has happened in 1HFY20. Within the MSME segment, NPL ratio in medium enterprises (aggregate exposure of Rs 15 crore-Rs 50 crore) saw a steeper increase compared to other segments in 2QFY20 (up 100 bps qoq to 18.1 per cent).

"The past report from CIBIL-MSME highlighted the inter-linkages between banks and NBFCs. A slowdown by NBFCs can by itself cause an aggravation to the already rising stress in the segment.

"PSBs have stepped in recently to lend and see whether they can fill the gap created by NBFCs which have slowed down. If the gap is filled, then it could avoid some NPLs as fund flow remains less affected," the analysts said.

Comparison of borrowers acquired in 2QFY18 versus 2QFY19 shows that a higher share of lower vintage (0-4 years) and higher risk (lower credit score) borrowers were acquired in 2QFY19, which led to an increase in the 12-month delinquencies in the latter cohort.