` Equity Research October 15, 2020

BSE Sensex: 40795 BFSI ICICI Securities Limited is the author and distributor of this report MSME credit – few traits of confidence emerging

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 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 Research Analysts: manufacturing, automobiles (manufacturing & dealership), textile etc., earlier perceived to be most vulnerable, fare better with greater share of CMR 6 or above Kunal Shah rated MSMEs. [email protected] +91 22 6637 7572  Metro market remains most vulnerable while rural, semi-urban are showing Renish Bhuva resilience - Overall MSME credit declined 4% YoY in June’20 - metro/urban regions [email protected] +91 22 6637 7465 witnessed the sharpest fall of 6% and semi-urban and rural markets showed some Chintan Shah resiliency (declined only 3% in June’20). At state level – two states namely [email protected] Maharashtra and Delhi witnessed the steepest fall of >7% YoY in MSME credit in +91 22 6637 7658 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.

Please refer to important disclosures at the end of this report

BFSI, October 15, 2020 ICICI Securities

MSME segment lags industry-wide growth Chart 1: MSME credit growth slumps amidst prolonged disruption 20.0

15.0

10.0

5.0

- Y/Y % Chg % Y/Y -5.0

-10.0

-15.0 Jul-19 Oct-19 Apr-20 Jun-19 Jan-20 Jun-20 Feb-20 Mar-20 Aug-19 Sep-19 Nov-19 Dec-19 May-20 <1mn 1-5mn 5-10mn 10-100mn 100-250mn 250-500mn >500mn Total Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 2: MSME/corporate credit distribution across ticket size remains stable Proportion of on balance-sheet commercial credit exposure across ticket- size 100.0

80.0

60.0 74.1 74.2 74.0 73.9 74.8 74.7 (%) 40.0

20.0 10.3 10.4 10.4 10.5 10.1 10.2 - Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

<1mn 1-5mn 5-10mn 10-100mn 100-250mn 250-500mn >500mn

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 3: Traits of confidence to boost sentiments for CUBK, Federal, SBI, Axis

50% 47% 45% 41% 40% 35% 33% 30% 25% 21% (%) 18% 20% 14% 15% 11% 10% 8% 10% 7% 6% 4% 5% 0% FB SBI KVB YES DCB AXIS CUBK KOTAK HDFCB AU SFB AU INDUSIND BANDHAN Note: 1) % refers to exposure to SME/MSME/Business Banking. 2) SBI value is as a proportion of domestic credit Source: Company, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

ECLGS scheme – Progress so far

Chart 4: For non-individual borrowers, PSU banks constitute >45% and NBFCs contribution very negligible

Sanctioned Disbursed Disbursed as a % of total sanctions

1,800 1,701 90% 85% 1,600 80% 77% 73% 1,400 69% 1,302 70% 1,200 60% 1,000 866 50% 805

Rs Bn Rs 800 682 40% 597 600 30% 400 20% 200 10% 30 22 - 0% PSB Private NBFC Total

Source: Ministry of Finance, I-Sec research

Chart 5: For individuals (post eligibility) both NBFCs, private banks are active

Sanctioned Disbursed Disbursed as a % of total sanctions 200 175 180 51% 50% 160 140 40% 35% 120 34% 30% 30% 100 89

Rs BnRs 74 80 59 20% 60 31 40 23 10% 20 11 6 - 0% PSB Private NBFC Total Source: Ministry of Finance, I-Sec research

Chart 6: SBI constitutes ~30% of PSB disbursements under ECLGS

Disbursed (Rs bn) Disbursed as a % of total sanctions

250 94% 91% 92% 93% 91% 100% 85% 85% 84% 88% 82% 83% 90% 200 80% 205 66% 70% 150 60% 50% 92 100 81 40% 70 60 30% 46 45 50 20% 25 23 16 10 9 10% - 0% SBI UBI BOI IOB PSB PNB BOB UCO BOM CBOI INDBK CANBK Source: Ministry of Finance, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Chart 7: PSB disbursements to non-individuals - Top 5 states constitute >45%

State-wise PSB ECLGS to Non-Individuals 80 74 120% 70 67 70 62 100% 60 50 43 80% 36 40 36 35 60% 28 27 30 25 25 25 24 22 19 18 40% 14 20 13 11 10 10 20% - 0% TN AP UP MP Delhi Bihar Kerela Others Assam Punjab Odisha Gujarat Haryana Rajasthan Karnataka Jharkhand Telangana Chattisgarh Uttarakhand Maharashtra West Bengal West Disbursed (Rs bn) Disbursed as a % of total sanctions

Source: Ministry of Finance, I-Sec research

Chart 8: Financiers’ confidence reflected in rising share of NTB/NTC customers

MoM credit enquiries by borrower type 100% 90% 20 21 20 30 27 31 80% 34 11 12 70% 14 20 60% 23 23 50% 26 (%) 40% 69 68 30% 64 47 52 20% 40 46 10% 0% Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Existing to Bank New to Bank New to Credit

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Trend in credit enquiries by borrowers

Chart 9: ECLGS scheme revived growth and had spurt enquiries in June/July

MoM change in no. of commercial credit enquiries (indexed to Feb-20) 1.9 2.0

1.5 1.2 1.0 1.0 1.0 0.8 0.9 (x) 1.0 0.7 0.6 1.0 0.8 0.4 0.4 0.5 0.7 0.1 0.6 0.6 0.4 0.1 - 0.2 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

PSB Private NBFC

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 10: PSU banks at forefront of disbursals under ECLGS scheme…

MoM loan disbursed in value (indexed to Feb-20) 2.6 2.8

2.1

(x) 1.4 1.0 1.0 1.0 0.8 0.6 0.7 1.0 0.4 0.2 0.2 0.2 0.5 - 0.1 0.2 Feb-20 Mar-20 Apr-20 May-20 Jun-20

PSB Private NBFC

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 11: ...leading to rise in market share for PSB at the cost of cautious NBFCs

Proportionate share of lenders in MSME over 2 years 100.0 90.0 80.0 51.3 51.3 50.8 49.4 49.0 70.0 54.9 53.4 52.7 51.6 60.0 50.0 (%) 40.0 30.0 33.6 34.1 34.4 35.3 36.3 36.5 37.9 38.1 38.7 20.0 10.0 11.5 12.5 12.9 13.4 12.4 12.7 12.7 12.9 9.7 0.0 Jun-18 Jun-19 Jun-20 Mar-19 Mar-20 Sep-18 Dec-18 Sep-19 Dec-19 NBFC Private PSB

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Chart 12: Across MSME categories, PSU banks continue to be dominant financier

Micro Small Medium NBFC, NBFC, NBFC, 9.6% 9.2% 10.4%

PSB, Private, 46.8% PSB, 29.7% 49.8%

PSB, Private, Private, 60.7% 39.9% 44.0%

Note: Lenders share across MSME segments as of Jun’20 Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 13: Credit enquiries spiked in June across states and then moderated

State-wise credit enquiries pre and post covid (Feb-20 enquiries indexed to 1) 1.8 1.7 1.5 1.5 1.6 1.4 1.4 1.3 1.3 1.4 1.2 1.1 1.1 1.1 1.1 1.2 1.0 1.0 0.9 0.9 1.0 0.8

(x) 0.7 0.8 0.9 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.6 0.7 0.7 0.7 0.7 0.6 0.6 0.4 0.5 0.2 - TN AP UP MP Delhi Bihar Kerala Punjab Odisha Gujarat Haryana Rajasthan Karnataka Jharkhand Telangana Chattisgarh Maharashtra Jun-20 Aug-20 Bengal West Feb-20

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 14: Credit enquires across regions sees robust uptick from April lows

Region-wise credit enquiries pre & post covid by regions (Feb-20 enquiries indexed to 1) 1.4 1.3 1.3 1.3 1.2 1.0 1.0 1.0 1.0 1.0 1.0 0.9 1.0 1.0 0.9 0.8 0.9 0.9 0.8 0.8 0.8 0.7 0.8 0.8 (x) 0.6 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 - Metro Urban Semi-Urban Rural

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Asset Quality & rating-wise portfolio quality

Chart 15: NPL ratios continue to rise despite moratorium benefit <1mn 1-5mn 10-100mn 100-250mn 250-500mn >500mn 21.0 19.4 20.1 19.0 17.7 17.3 17.0 17.3 17.5 15.6 15.6 15.0 14.5

(%) 12.6 13.0 13.3 13.1

11.0 10.0 10.7 9.0 10.3 9.1 8.9 8.7 7.0 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 16: Default rate post-Covid rises for all profile; moreso for sub-prime

Proportion of missed payments for term loan

40% 36% 35% 29% 30% 25% 25% 20%

15% 11% 9% 9% 10% 5% 0% Pre-COVID Post-COVID Super Prime Prime Sub-Prime

Source: TransUnion CIBIL, SIDBI, I-Sec research Note: CMR1-3 refers to Super Prime, CMR 4-6 refers to Prime and CMR 7-10 refers to Sub-Prime

Chart 17: ECGLS eligibility lean towards super-prime/prime instilling confidence

Region-wise & Rating-wise portfolio distribution of MSMEs as of Feb-20 (for all MSMEs in industry & the ones eligible for ECLGS)

60 56 50 50 45 43 40 40 37 39 39 40 33 35 26 30 25 23 (%) 17 18 18 20 16 10 0 Micro Small Medium Super Prime - All MSME Super Prime - ECLGS eligible Prime - All MSME Prime - ECLGS eligible Sub Prime - All MSME Sub Prime - ECLGS eligible

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Chart 18: PSBs disbursements tilted towards prime/sub-prime categories

Rating-wise PSB MoM loan disbursals (by volume) 100.0% 90.0% 18.0% 18.6% 21.2% 20.8% 20.2% 80.0% 70.0% 37.5% 38.2% 60.0% 38.5% 38.3% 43.1% 50.0% 40.0% 30.0% 44.5% 20.0% 43.1% 40.3% 40.9% 36.7% 10.0% 0.0% Feb-20 Mar-20 Apr-20 May-20 Jun-20

Super Prime Prime Sub-Prime

Source: TransUnion CIBIL, SIDBI, I-Sec research Chart 19: Trend not too different for private banks too…

Rating-wise Pvt banks MoM loan disbursals (by volume) 100.0% 10.2% 12.2% 90.0% 14.9% 14.9% 13.6% 80.0% 70.0% 37.2% 33.4% 27.3% 27.3% 35.5% 60.0% 50.0% 40.0% 30.0% 57.7% 57.7% 52.6% 54.4% 50.9% 20.0% 10.0% 0.0% Feb-20 Mar-20 Apr-20 May-20 Jun-20 Super Prime Prime Sub-Prime

Source: TransUnion CIBIL, SIDBI, I-Sec research

Chart 20: NBFCs sub-prime portfolio disbursements inches much higher

Rating-wise NBFC MoM loan disbursals (by volume) 100.0% 14.5% 14.5% 90.0% 21.1% 21.7% 21.2% 80.0% 70.0% 60.0% 49.1% 37.8% 55.2% 38.1% 41.6% 50.0% 40.0% 30.0% 20.0% 41.1% 40.2% 37.1% 36.4% 30.3% 10.0% 0.0% Feb-20 Mar-20 Apr-20 May-20 Jun-20 Super Prime Prime Sub-Prime

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Chart 21: Logistics, hotel/tourism have higher share of sub-prime MSME loans 100% 90% 22% 34% 33% 33% 33% 32% 31% 30% 30% 30% 29% 29% 80% 42% 38% 37% 37% 35% 70% 60% 40% 27% 28% 33% 34% 34% 33% 29% 50% 28% 27% 27% 29% 31% 35% 35% 37% 40% 34% 30% 42% 20% 35% 38% 39% 40% 39% 38% 37% 34% 37% 36% 36% 38% 38% 10% 24% 27% 26% 0%

Super Prime Prime Sub-Prime

Source: TransUnion CIBIL, SIDBI, I-Sec research

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BFSI, October 15, 2020 ICICI Securities

Price charts HDFC Bank IndusInd Bank 900 1500 2,200 1,800 800 1,600 700 1300 1,700 1,400 600 1100 1,200

500 1,200 (Rs) (Rs) (Rs) 400 900 (Rs) 1,000 300 700 800 200 700 600 100 500 200 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20

Bandhan Bank State 800 425 450 300 400 700 375 350 250 600 325 300 250 200 500 275 (Rs) (Rs)

(Rs) 200 (Rs.) 400 225 150 150 300 100 175 100 200 50 125 0 100 50 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Sep-20 Mar-18 Mar-19 Mar-20 Sep-18 Sep-19 Sep-20 DCB Bank AU SFB 300 140 1,350 140 250 120 1,200 120 100 1,050 200 100 80 900 150 80 (Rs) (Rs) 60 (Rs) 750 (Rs) 100 40 600 60 50 20 450 40 300 0 0 20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Sep-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Source: Bloomberg

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BFSI, October 15, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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