Bad loans in the small and medium sector are rising despite the overall decline in bad loans in the commercial lending business of the banking sector. Non-performing assets (NPAs) of medium, small and micro enterprises (MSMEs) have risen 50 basis points (bps) to 12.2 per cent as of September 2019, as against 11.7 per cent in September 2018, according to data from a credit information company TransUnion CIBIL.
However, the overall NPAs of commercial lending declined 20 bps to 16.8 per cent in September last, marginally lower than 17 per cent in September 2018, the report said.
The Reserve Bank of India’s Financial Stability Report had last week indicated the worst may not be over for banks on the bad loan front, as their gross NPA ratio may rise to 9.9 per cent by September 2020 from 9.3 per cent in September 2019. Gross NPA ratio of banks stood at 9.3 per cent in March 2019, the report said.
The Cibil study said that the bad rate on MSME borrowers, who were hit badly by demonetisation and GST implementation, rose to 3.02 per cent in the quarter ended September 2019 from 2.94 per cent in the September 2018 quarter. “Major factor contributing to this marginally higher bad rate is the increase in the share of lending towards lower vintages and high risk borrowers in Q2 of FY19. Study on vintage distribution of borrowers acquired in Q2 of FY19 shows that there is a significant increase in the acquisition of lower vintage borrowers (with credit history of 1-4 years),” Cibil said.
Commercial entities with aggregate credit exposure of Rs one crore are classified under micro segment; between Rs 1 crore and Rs 15 crore are considered small; and those with credit exposure between Rs 15 crore and Rs 50 crore are classified as medium-sized enterprises. MSME segment, with aggregate credit exposure of up to Rs 50 crore, forms Rs 18.3 lakh crore outstanding (28 per cent of commercial credit outstanding). Large corporates, with aggregated credit exposure of over Rs 50 crore, account for Rs 46.7 lakh crore (72 per cent of commercial credit outstanding).
The proportion of borrowers with high bad rate peaks in the lower (1-4 years) vintage bucket, as compared to newly acquired (0-1 years) vintage bucket and higher vintage buckets (4 plus years). Also, the proportion of borrowers acquired in highest risk segment (CMR-7 to CMR-10) has rise from 13.5 per cent to 15.7 per cent, contributing to the rise in bad rate. CMR is a credit risk rank — with CMR 1 and 2 being the lowest risk and CMR 7 to 10 at highest risk — for MSMEs that predicts the probability of an MSME becoming NPA in the next 12 months.
“At a time when commercial credit growth was slowing down, growing 8.1 per cent over the year, gross NPA has increased by only at 6.8 per cent resulting in lowering of NPA rate by 20 bps. The gross NPA amount increased from Rs 10.2 lakh crore in September 2018 to Rs 10.9 lakh crore in September 2019,” it said. NPA rate in commercial lending was at a peak of 17.5 per cent in June 2018, but due to various reform measures, it fell to 16.8 per cent, Cibil said.
According to the TransUnion CIBIL MSME Pulse Report, commercial credit — which had been steadily growing over the past few years — has slowed down in the recent quarters. The year-on-year (y-o-y) commercial credit growth stood at 8.1 per cent in the quarter ended September 2019, significantly lower than the annual credit growth rates of previous quarters. Credit growth measured 16.2 per cent during December 2017 to December 2018, 12.6 per cent during March 2018 to March 2019 and 14.8 per cent during June 2018 to June 2019 period. In the MSME segment, y-o-y growth stood at 7.7 per cent, 4.6 per cent and 1.9 per cent for micro, small and medium enterprises, respectively, for the period from September 2018 to September 2019.
Satish Pillai, MD and CEO, TransUnion CIBIL, said: “We know that the industry level credit exposure trends are driven by either growth or slowdown in fresh loan disbursals, changes in utilisation levels of existing limits or changes in the percentage of exits of existing limits and we are examining the contribution of each element at a sectoral level to help lenders find the risk and opportunities as well as possible solutions to drive sustained growth.”
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