MSME credit continues to have lowest rate of default in commercial lending

MSME credit continues to have lowest rate of default in commercial lending

Structurally stronger MSMEs most eligible for financial assistance forrefueling growth

The latest edition of the TransUnion CIBIL-SIDBI MSME Pulse Report reveals that the default rates across all the MSME segments continue to be lower than those of the large corporates. In Jan’20 the non-performing assets(NPA) rate for large corporates was at 19.7% while the NPA rate in the MSME segment stood at 12.5%. 

The total on-balance sheet commercial lending exposure in India stood at ₹64.45 lakh crores as of Jan’20 of which the MSME segment holds ₹17.75 lakh crores credit exposure. 

Within the MSME segment, Micro segment borrowers (aggregate credit exposure <1cr) observed robust fresh credit disbursals worth ₹92,262 crores in CY 2019.

Finding and funding the good MSMEs

This edition of MSME Pulse covers a study conducted on the assessment of the structural strength of MSMEs and classifies entities that are positioned strong to tide over the pandemic situation. Structurally stronger MSMEs are expected to be in a position of low leverage and high liquidity prior to the pandemic situation. CIBIL MSME Rank (CMR) and credit utilization of MSMEs are used to identify and map the position of MSMEs. 

This hypothesis is back-tested under two scenarios– the first being the Goods and Services Tax (GST)implementation period starting Jul’17 while the second covers the period starting Jul’18 which includes NBFC liquidity crunch and MSME credit growth slow down post Mar’19. 

By mapping the CMR and credit utilization of MSMEs during these two scenarios, we are able to understand their position before they entered previous disruptive phases and track their performance in the subsequent 12 months. This can the help predict the ability of entities to continue to remain stable and weather the current pandemic situation.

Speaking on the insights from this study, the MD and CEO of TransUnion CIBIL, Mr. Rajesh Kumar said, “The findings of the study make the case that structurally strong MSMEs are better positioned to survive the current pandemic situation and emerge stable. These MSMEs are the most eligible to receive financial assistance from credit institutions. 

There is an opportunity here for banks and financial institutions to identify and fund these entities and build a healthy portfolio. Such targeted interventions can help refuel the economy through these unprecedented times while ensuring that portfolio risk is under control.”

“TransUnion CIBIL is committed to supporting the credit sector, the regulator and the government with rich insights and solutions towards the formulation of judicious policies to drive access to finance for MSMEs, while ensuring the stability of credit portfolios and navigating the economy back on the growth track,” added Rajesh.

While the impact of the lockdown may be more pronounced than that of the earlier events simulated in the analysis, the core essence of the simulation study highlights the attributes to identify stronger MSMEs and their lower likelihood of getting impacted by the financial pressures of the pandemic situation. 

The findings of this study on the position of MSMEs prior to current lockdown, conclude that almost two out of three MSMEs entered this lockdown with structurally strong positions of which about half are very strongly positioned.

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