A weaver uses a handloom to make a silk sari at a workshop in Varanasi. (Photographer: Dhiraj Singh/Bloomberg)

Driven By MSMEs, Commercial Credit Grows Fastest In Five Quarters

Commercial credit to businesses, ranging from small to medium and large, rose at its quickest pace in the last five quarters, adding to signs of a pick-up in economic activity. This growth in commercial credit, while broad based, was highest in the micro and small and medium enterprises segments, showed the MSME Pulse report released by TransUnion CIBIL and SIDBI this week.

According to the report:

  • Overall commercial credit grew 8.1 percent between March 2017 and March 2018
  • Commercial credit to large corporates grew 5.9 percent
  • Credit to mid-sized companies grew 7.2 percent
  • Credit to SMEs grew by 12.8 percent
  • Credit to micro enterprises rose by 22.2 percent

The report collects data from commercial banks, cooperative banks, regional rural banks, non-banking finance companies and housing finance firms. It does not include credit drawn by companies directly via the bond markets.

The pick-up in commercial credit gives credence to the belief that the economy and investment in the economy is strengthening. Over the past two years, credit growth has been weak, particularly to large corporates which have been burdened with debt.

After the lows of September 2017, even exposure of the Large (credit exposure greater than Rs 100 crores) segment has grown two consecutive quarters showing early signs of recovery in credit growth.
MSME Pulse Report (TransUnion CIBIL and SIDBI)

Bad Loan Trends

According to the report, bad loans continued to rise in the large corporate segment but the pace of deterioration across mid-sized (MID) and MSME borrowers has moderated.

For large corporates, non-performing assets rose to 18 percent, double of what the NPA ratio in this segment was two years ago. The banking system’s current bad loan problems has been led by large corporates.

In a trend reversal, the NPA rate for the mid-corporate segment fell by half a percentage point to 15.9 percent. This was on the back of higher credit growth to the segment as well as purchase of bad debt by asset reconstruction companies.

The overall NPA rate of commercial lending was at 16 percent in March 2018 compared to 14.4 percent in March 2018, the report noted. After registering a steep rise in the third quarter of financial year 2017-18, growth in NPAs has moderated and maybe close to bottoming out, the report noted.

Driven By MSMEs, Commercial Credit Grows Fastest In Five Quarters

Expansion Of The MSME Segment

The report also noted that the pace at which new small and medium borrowers are entering the formal credit system has increased. This coincides with the introduction of GST and the push for MSME credit via the government’s MUDRA scheme.

The report estimates that 5 lakh new-to-credit (NTC) borrowers are likely to enter the formal borrowing segment in the first half of 2018. This is 21 percent higher than the 4 lakh new borrowers in the second half of 2017.

The highest growth is likely in the ‘very small’ segment (less than Rs 10 lakh) exposure). As a percentage of the total borrower base, new borrowers are expected to grow from 7.2 percent to 11.9 percent in this segment.

Formalization of commercial credit will help add a million a year new-to-credit MSME borrowers making MSMEs an attractive target segment for institutional lenders. Their portfolio study further suggests that 60 percent of these first-time borrowers sustain or increase their credit in the two-year period following their first formal loan. 
Satish Pillai, Managing Director and CEO, TransUnion CIBIL

While explaining the behavior of new borrowers between March 2016 and March 2018, the report said that 15.9 percent of new borrowers in the sub-Rs 10 lakh bucket turned into NPAs. 28.7 percent of these borrowers exited formal borrowing. The largest proportion (52.8 percent) stayed in the same borrowing bucket.

Among new borrowers in the Rs 10 lakh to Rs 1 crore bucket, 70 percent remained in the same borrowing segment. 19 percent of them exited formal lending and only 4.3 percent turned into NPAs.

Larger new borrowers in the Rs 1 crore to Rs 10 crore segment also saw an NPA rate of just 4.3 percent. 21.5 percent of these new borrowers exited, while 65.8 percent remained borrowers in the same segment.