Analyst Corner: Public Sector Banks to benefit from RBI nod to rejig MSME loans


The timing is a surprise as the last available data are not showing rising trends of impairment.

RBI has allowed banks/NBFCs to undertake a one-time restructuring exercise of MSME borrowers who are stressed but yet to be classified as NPLs. Lenders would have to make 5% provisions on these accounts.
We don’t see material impact on banks/NBFCs under our coverage as the trends are not showing any signs of further deterioration, but public banks, which have higher impairments in this portfolio, could stand to benefit. The timing is a surprise as the last available data are not showing rising trends of impairment.

RBI has permitted a one-time restructuring of MSME loans (loan exposure up to `250 million by both banks and NBFCs). The borrower (GST registered) should have defaulted/ days-past-due (0-90 days) as on January 01, 2019 but is currently to be classified as “standard”. The restructuring should be completed by March 31, 2020 and lenders would have to make a provision of 5% on these restructured loans and provide disclosures of the same in the notes to accounts.
MSME accounts for 25% of commercial lending in India as of FY2018 (`23 tn).

The segment has recorded 18% y-o-y growth in Q1FY19. Of this, the exposure which is up to `250 mn is `13 tn (13% of total loans) and grew 16% y-o-y. Growth is skewed towards the lower end of the spectrum with average ticket size of <`5 mn.
With a gradual push towards formalisation and higher availability of income disclosures on account of GST, credit growth has ramped up in recent quarters. NBFCs and private banks have grown faster than public banks.
We are quite surprised at the timing of the notification. Lenders usually step back lending when the early warning indicators suggest rising trends of deterioration.

However, the last available data (Q1FY19) suggest that lenders have been quite comfortable and growing this portfolio at a healthy pace. The gross NPLs have been stable in recent quarters.
Further, the financial stability report that was released a few days ago discussed the relative differences in the quality of underwriting between different players as public banks have shown disproportionately higher NPLs than private banks or NBFCs.
RBI has suggested the need to tighten the credit screens when onboarding these borrowers for public banks.

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