Next set of asset quality woes for lenders to come from MSME segment | Business Standard News

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Gross NPAs at 12.8 per cent in June are up 140 bps year-on-year, marking the sharpest surge across asset pools

Worries over MSME and retail loans is also a reason why banking stocks in general have been laggards on the bourses in 2020-21

Every asset quality cycle has a pattern. The previous one, which lasted from financial year 2015-16 (FY16) to 2018-19 (FY19), was dominated by lumpy corporate sector loans.

And just as that segment was being cleaned up, there are indications that the next wave of woes could come from the micro, small and medium enterprises (MSMEs), and retail segments.

Data published this week by TransUnion CIBIL, in collaboration with SIDBI, reveal some unnerving statistics that indicate the brewing trouble.

Sample this: While there has been an increase in credit enquiries from MSME borrowers, the proportion is skewed towards sub-prime borrowers.

Second, and the more worrisome aspect, was that non-performing assets (NPAs) for MSME loans surpassed the year-ago level of 11.4 per cent by 140 basis points year-on-year to reach 12.8 per cent in the June 2020 quarter, marking the sharpest surge across asset pools in the banking sector.

In other words, there has been a spike in bad loan accretion despite banks having extended the moratorium till August. And, without further forbearance, such as restructuring or moratorium extension, MSMEs could pose a larger risk to lenders.

Analysts at Axis Capital have assumed a 50-100 per cent increase in the NPA ratio for MSME loans.

MSMEs are an important segment for banks, accounting for 25 per cent of overall commercial credit, and constitute 7-20 per cent of banks’ loan assets, with the exception of AU Small Finance Bank, for which this figure stood at 36.6 per cent till June end.

With non-banking financial companies (NBFCs) aggressively conserving liquidity, banks, particularly public sector banks (PSBs), have regained some lost market share since December 2019. While the market share of private banks has risen from 37.9 per cent to 38.7 per cent, for PSBs it has increased from 49.4 per cent to 51.6 per cent.

However, this comes at a time when the pool of prime borrowers is shrinking. TransUnion CIBIL’s report says the share of super-prime and prime borrowers collectively has reduced from 82 per cent in February to 79 per cent in June for PSBs. For private banks, the number has shrunk from 90 per cent to 86.1 per cent.

This probably explains why despite the spike in enquiries from new-to-credit and new-to-bank customers, banks have increasingly preferred lending more to existing customers.


Enquiries from this category of customers increased from 31 per cent in April to 54 per cent in June.

Disbursements to existing customers stood at 94 per cent in June as against 57.4 per cent in February, before the Covid-19 outbreak in India.

However, that still doesn’t insulate banks from defaults. There has been a steep increase in missed payments — up from 9 per cent in February to 25 per cent in June for the super-prime borrowers and for subprime borrowers from 11 per cent to 36 per cent, indicating that even the existing pool of MSME customers could be under stress and recoveries and collections could be stretched.

Also, though the government might foot the interest on interest for loans up to Rs 2 crore during the moratorium period, the downside risks remain, given the economic conditions.

It will be a tightrope walk for banks to ensure that harvesting on existing customers doesn’t lead to over-leveraging, even as they look to grow in this segment to keep NPAs from MSMEs in check.

“Historically, NPA rates in the MSME lending space have been higher than the overall NPA, and Covid-19 has further aggravated the problems. Repayments will largely depend on revival of demand,” says Suresh Ganapathy of Macquarie.

He believes ICICI Bank and HDFC Bank will be relatively insulated from these asset quality troubles.

Worries over MSME and retail loans are also a reason why banking stocks have been laggards on the bourses so far in FY21. The September quarter numbers and management commentaries will reveal a clearer picture on the depth of pain for banks.

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