Commercial Credit Growth Back To Pre-Pandemic Levels: Report Public sector banks emerge as the leading contributors to a resurgence in MSME credit growth

Findings from the latest edition of the TransUnion CIBIL-SIDBI MSME Pulse Report indicate that under the aegis of the government's Emergency Credit Line Guarantee Scheme (ECLGS), commercial credit inquiries surged 58 per cent year-on-year (y-o-y) in June 2020 and stabilized toward the end of the year, up around 13 per cent y-o-y as of December 2020, which is similar to pre-COVID growth levels. The total on-balance-sheet commercial lending exposure in India stood at INR 71.25 lakh crore in September 2020, clocking a growth rate of 2.1 per cent y-o-y.

For the MSME segment, credit exposure stood at INR 19.09 lakh crore as of September 2020, showing y-o-y growth of 5.7 per cent. This credit growth is observed across all the sub-segments of MSME lending, the report said.

MSME loan originations show a V-shaped recovery with the ETB segment being the primary beneficiary.

Report analysis indicates that MSME loan originations growth during January 2020 and February 2020 was over 30 per cent y-o-y. However, this growth rate reduced significantly in March 2020 and April 2020 consequent to the COVID-19 lockdowns.

With the launch of the ECLGS, loan originations surged in June 2020, growing at 115 per cent over June 2019 and continued to be high and close to pre-COVID levels for the remainder of the year. This strong rebound in MSME loan originations was driven by the existing-to-bank (ETB) segment.

Borrowers who have an existing commercial credit relationship with the lender are defined as ETB. This is primarily due to the design of the ECLGS, where the guidelines mandate lenders to extend 20 per cent of credit to existing borrowers. Consequently, the y-o-y growth in ETB loan originations crossed 200 per cent in the first month of the ECLGS infusion. Since then, this spike has tapered off, but ETB originations continue to stay buoyant. On the other hand, new-to-bank (NTB) originations are finding it hard to recover to pre-COVID levels.

"The resurgence in MSME credit growth, which is back at pre-pandemic levels, is a very promising indicator of economic recovery in our markets. Public Sector Banks (PSB) are the leading drivers of this resurgence as they have astutely wielded data analytics and credit information solutions to swiftly comply with the ECLGS guidelines and dexterously implement lending to MSMEs. The recent budget announcement by the honorable finance minister has doubled the contribution to the MSME sector over last year, which shall further provide much-needed financial support to the sector. TransUnion CIBIL is committed to working with all the ecosystem players including the government, the regulator, lenders, and last-mile MSMEs to support the sustainable growth of the sector," said Rajesh Kumar, managing director, and chief executive officer, TransUnion CIBIL.

Non-metro geographies are leading the rebound in MSME credit

On studying trends at a geographic level, a significant increase is observed in the growth of loan originations in the urban, semi-urban and rural regions which were subjected to less stringent and shorter lockdowns. Metro cities that experienced stricter lockdowns showed muted growth. It is observed that MSME credit disbursals in metro cities were most impacted during April and May 2020, however, these have bounced back in June 2020 after the ECLGS implementation.

Industry sectors that are dependent on consumer discretionary spends show higher downgrades

The report covers an analysis based on the CIBIL Rank, which is an indicator of the credit risk associated with MSMEs. CMR assigns a rank to the MSME based on its credit history data on a scale of 1-10, CMR 1 being the best possible rank and CMR 10 being the riskiest rank for MSMEs. In this edition of MSME Pulse, CMR transition is monitored for borrowers over a one-year period starting September 2019-20 for rank buckets of CMR 1-3, CMR 4-5, CMR 6-7 and CMR 8-10. It is observed that 36 per cent of borrowers who were in the CMR 1-3 bucket in September 2019 downgraded to lower rank buckets by September 2020 and 15 per cent of the borrowers who were CMR 4-5 in September 2019 upgraded to a higher rank bucket by September 2020.

Further study on CMR downgrades across sectors reveals that rank deterioration is relatively lower for MSMEs that are focused on consumer staples or necessity sectors like auto, infrastructure, and FMCG and higher for MSMEs where consumer discretionary spends are highest –sectors like hospitality, commercial real estate and textiles.

"Credit growth to MSME sector has witnessed sharp rebound and registered 5.7 per cent y-o-y growth in September 2020, on account of large policy stimulus by Government including ECLGS. Public sector banks have been the front runners in supporting the MSMEs during the pandemic and as the economic activity has rebounded, private banks and NBFCs are also witnessing a spurt in credit demand. As we move ahead on the path of growth, we need to carefully monitor the risk build-up signs, especially, in micro-segment which is witnessing comparatively higher CMR downgrades," shared V. Satya Venkata Rao, deputy managing director, SIDBI.

MSME credit profile dynamics changing rapidly post-pandemic

MSME Pulse observed a definite shift in the credit profile dynamics of MSMEs – a reduction in average loan size, spurred by the 20 per cent cap of the ECLGS, was observed amongst both existing and new borrowers.

Another clear shift was that approval rates increased across all lenders with the backing of the 100 per cent credit guarantee of the ECLGS primarily lead by PSBs. Even though private banks and NBFCs are gradually returning back to pre-COVID levels, PSBs continue to have over twice the approval rates of their pre-COVID levels. The biggest beneficiaries of the increased approval rates are high-risk segment MSMEs with CMR7-10, which had the highest rise in approval rates relative to their pre-covid-19 levels. Important to note that before the COVID-19 pandemic, PSBs had sub20 per cent and private banks had about 50 per cent y-o-y growth in originations during January-February 2020 period. Post pandemic, since April 2020 onwards, PSBs have accelerated originations and taken the pole position in the month-on-month MSME loans originations.

"While Public Sector Banks have taken a benchmark lead in MSME loan originations post the ECLGS implementation, Private Bank and Non-Bank Financial Companies are closing the gap rapidly and have scaled originations growth significantly over the recent months. The credit industry has a huge role to play in not only the resurgence of our economy by driving credit infusion, but most importantly safeguarding its stability by carefully monitoring risks and controlling those in a timely and efficient manner," concluded Kumar.