BFSI - MSME credit - few traits of confidence emerging - ICICI Securities

MSME segment was anticipated to bear the biggest brunt of prolonged disruption and be the most vulnerable amidst Covid-19 pandemic - more so vindicated by a sharp decline in credit flow to MSME sector in April-May'20. However, ECLGS scheme (Rs1.88trn sanctioned and Rs1.36trn disbursed till date) revived the credit flow since June'20 and currently credit enquiries on MoM basis have settled at >85% of pre-Covid level, as per latest TransUnion CIBIL data. Further, taking clues from following parameters, pain seems manageable to financiers for now: A) the proportion of credit enquires from new-to-credit and new-to-bank customers reaching pre-Covid level of 31%/23%, respectively, in August'20 (reflecting financiers confidence in few sub-segments); B) ~81% of eligible MSMEs for ECLGS scheme belong to better-rated SMEs 'up to CMR-6' (with liquidity support can revive faster). Geographically, states like Bihar, Jharkhand, Punjab and Kerala are leading the bounce back while pace of revival is slow in Maharashtra and Delhi. Few traits of confidence emerging in MSME segment will benefit banks with higher exposure namely SBI, Axis, CUBK, Federal and DCB.

- Timely implementation of ECLGS schemes kick-started credit flow to MSME - MSME credit enquiries dipped during Covid-19 pandemic to 23% in Apr'20 (of Feb'20 level) and 40% in May'20. Sanctions under ECLGS scheme kick-started the much-needed revival in enquiries - with cumulative Rs1.88trn sanctions enquiries are settling at >85% of pre-Covid level now. Banks remained at the forefront in disbursements under ECLGS - PSU banks constituting >45% of sanctions led to 2.6x higher lending to MSMEs in Jun'20 over Feb'20 and private banks, with >50% sanctions, were back to pre-Covid level. NBFCs have been too conservative disbursing only up to ~20% of pre-Covid level in June'20 and have lost >2% points market share to banks. Even in July-August'20, MoM credit enquiries for NBFCs are merely at 60% of pre-Covid level while banks have touched ~85%, indicating NBFCs continued making loss in market share all through Q2FY21.

- Rating distribution suggests micro & small borrowers are on a better footing. MSME categorisation based on CMR ratings suggests micro and small borrowers are having higher proportion of CMR-6 or better rating at 67% & 75%, respectively. Further, 81% of eligible MSMEs belong to strong CMR-6 or provide further confidence in MSMEs' debt-servicing ability as liquidity support can help them revive faster.

- Sector-wise distribution of MSME based on CMR suggests majority of MSMEs across sectors are structurally strong - CMR distribution of MSMEs (for sectors mentioned in the RBI's report on Resolution Framework for Covid-19 related Stress) indicates sectors like logistics, hotel-restaurant-tourism and mining appear more vulnerable with higher proportion of sub-prime MSMEs. However, sectors namely manufacturing, automobiles (manufacturing & dealership), textile etc., earlier perceived to be most vulnerable, fare better with greater share of CMR 6 or above rated MSMEs.

- Metro market remains most vulnerable while rural, semi-urban are showing resilience - Overall MSME credit declined 4% YoY in June'20 - metro/urban regions witnessed the sharpest fall of 6% and semi-urban and rural markets showed some resiliency (declined only 3% in June'20). At state level - two states namely Maharashtra and Delhi witnessed the steepest fall of >7% YoY in MSME credit in June'20. Most states witnessed MoM credit enquires reaching pre-Covid level in June'20 except four states namely Maharashtra, Delhi, Telangana and Andhra Pradesh. However, post-ECLGS disbursements in June'20, enquiries in semi-urban and rural regions settled at ~75% of pre-Covid level in July-August'20.

Source : Equity Bulls

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