` Equity Research October 15, 2020 INDIA BSE Sensex: 40795 BFSI ICICI Securities Limited is the author and MSME credit – few traits of confidence emerging distributor of this report 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 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 2 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 3 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 4 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 5 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