Sector Update | 13
|
May 2020
Sector Update Financials
Financials
d
Relief package announced – Much awaited steps for MSMEs
and NBFCs
New measures to help start credit cycle
Finally, the Indian government (GOI) has introduced a slew of measures to ease
liquidity issues and improve risk appetite with credit guarantees for MSMEs/NBFCs.
Incremental 20% credit flow (to take care of operational expenses) to exiting
exposures with moratorium on principal and guarantee should help the MSME space.
This comes as a huge relief to genuine cases, as otherwise the liquidity problem would
have turned into a credit problem for the system.
Direct liquidity flow of INR300b to investment grade NBFC and partial credit guarantee
(20%) to low rated NBFC paper worth INR450b should help resolve near-term liquidity
issues of the NBFC sector.
Overall the government’s bold liquidity and stimulus package toward MSMEs/NBFCs is
an important announcement and would provide the much needed relief to the sector.
Despite the earlier liquidity enhancing measures, lenders were still wary of lending to
the segment fearing credit risk. This would also encourage banks to lend.
While the special liquidity window to NBFCs and the Partial Credit Guarantee (PCG) for
NBFC borrowings are also positive in the near term, we believe the quantum may not
be enough for the NBFC sector as a whole from a medium-term perspective. We
maintain improvement in the demand/macros scenario is the key for the system to
have better risk appetite for NBFCs.
With announcement of the new measures, NBFCs that are most likely to be positively
impacted are SCUF, CIFC and Repco. We maintain our preference toward large private
banking franchises with robust liability mix and diversified asset base. Top ideas:
ICICIBC, HDFCB and SBIN among banks and HDFC in NBFCs.
MSME package – Full guarantee and equity support a positive surprise
Banks and NBFCs can provide an emergency credit line to MSMEs up to 20% of the
credit outstanding as of Feb’20.
The Principal and interest would be 100%
guaranteed by the government.
The key criteria for this line are: (a) borrowers
should have sub-INR250m borrowings and INR1b turnover, (b) loans to have a 4-
year tenor with principal moratorium for the first 12 months, (c) interest rate on
these loans would be capped, and (d) the scheme could be availed till 31
st
Oct’20.
According to the GOI, this would directly benefit 4.5m units to resume business
activities. Further, the GOI is also likely to provide INR200b equity support to
stressed MSMEs (GOI estimates it at ~200k) and INR500b equity support via Fund of
Funds structure to promising MSMEs. While there were speculations about partial
guarantee, full guarantee on incremental disbursements and equity support is a
positive surprise.
No immediate sharp surge of MSME NPAs post moratorium period now
In our view, two important points need to be considered: (a) It is a big relief to
genuine cases, otherwise liquidity problems could have turned into a credit
problem, and (b) For cases that are facing business risk, which are unviable even
after providing liquidity, credit risk may get pushed to a year down the line and
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
Himanshu Taluja
(Himanshu.Taluja@motilaloswal.com)
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com);
Yash Agarwal
(Yash.Agarwal@motilaloswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
13 May 2020
1
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 Motilal Oswal Financial Services
Sector Update | Financials
would increase the risk in the balance sheet. Based on existing moratorium
schemes, there was a high likelihood of NPAs of MSMEs surging. This is because
businesses would take time to return to normalcy, especially with the weak demand
and issue of migrant workers. While it is unclear whether the credit guarantee
would apply to the entire tenor of the loan or not, it would definitely boost credit
flow to the MSME segment. Note that total credit to the MSME sector is estimated
at ~INR18t.
Special Liquidity and partial guarantee scheme for NBFCs
The government would facilitate a special liquidity scheme for NBFCs, HFCs and
MFIs.
Under this scheme, investment up to INR300b would be made in primary
and secondary market transactions in investment grade debt paper of these
companies. More importantly, the securities would be fully guaranteed by the RBI.
Further, the GOI has come out with a partial guarantee scheme of INR450b for low
credit rating (AA and below) category NBFCs, wherein the first 20% is guaranteed by
GOI for primary issuances. In 2019, the government introduced a Partial Credit
Guarantee (PCG) scheme where the GOI provided a first loss guarantee on the
securitized pool of assets bought by PSBs. This scheme has now been included to
cover borrowings such as NCDs and CPs by NBFCs.
Immediate liquidity problem addressed; Demand key to risk appetite
Both schemes would provide immediate liquidity to NBFCs to tide over repayments
on the liability side. With the strong cash balances, most NBFCs under our coverage
are comfortable for the next 1-2 quarters on liability repayment despite higher
expected moratorium on the asset side and only a partial or no moratorium on the
liability side. However, we believe this scheme would address near-term liquidity
problems of Tier-II NBFCs and MFIs as risk aversion is significantly higher for them at
the system level and many such entities have not received the benefit of TLTRO and
other RBI measures so far.
Widening the definition of ‘MSME’ to include more borrowers
The government has changed the definition of NBFCs to widen the scope of
borrowers falling under the MSME category. For example, the maximum investment
criterion for ‘micro’ classification has been changed from INR2.5m/INR1m in case of
manufacturing/services to INR10m for both.
Valuation and view
The government’s bold stimulus/liquidity package toward MSME/NBFC is an
important announcement and would provide the much needed relief to the sector.
Despite the earlier liquidity enhancing measures, lenders were wary of lending to
these segments fearing credit risk. With full collateral-free guarantee on loans worth
INR3t (17% of outstanding loans), it would encourage lenders (especially banks with
no liability challenge) to lend to the MSME segment, which plays a critical role in
GDP contribution/employment. We believe that the benefit would be more for PSU
Banks as their NPL formation in this segment is materially higher and they would
now be able to tide over the current situation by providing adequate liquidity to the
borrower. Private banks have displayed better underwriting in this segment and
their NPL is less than one-third of PSU banks; however, it would also stand to benefit
with gains being relatively more for mid-Tier banks given their relatively higher
13 May 2020
2
 Motilal Oswal Financial Services
Sector Update | Financials
exposure to the segment (Federal Bank, City Union Bank, DCB, etc.). This package
would also help banks see some relief on their book under moratorium as MSME
borrowers are more exposed to liquidity/cash flow issues and would have seen
higher incidences of the moratorium being availed. Within NBFCs under our
coverage, SCUF, CIFC and REPCO should emerge as the key beneficiaries. We
maintain our preference toward large private banking franchises with robust liability
mix and diversified asset base.
Top ideas: ICICIBC, HDFCB, HDFC and SBIN.
Exhibit 1:
O/s loans to MSME stands at INR17.7t as on
Jan’20
MSME
Exhibit 2:
PSU forms ~50% of o/s MSME loans while private
banks form ~38%
12.5%
PSU Banks
15.9
18.3 18.8 18.5 18.3 17.9 17.7
17.0 17.2
17.5
49.8%
37.6%
Pvt Banks
NBFCs
Source: MOFSL, Transunion CIBIL
Source: MOFSL, Transunion CIBIL
Positive for PSU and mid-
sized private banks given
their high exposure toward
MSME segment
Exhibit 3:
NPA for PSU stands much higher at 18.7% while it stands low at ~5% for private
banks
4QFY20 (INRb)
AXSB
DCBB*
HDFCB
ICICIBC
IIB
KMB
FB*
BOB*
PNB*
SBIN*
*As on 3QFY20
MSME/
Business Banking (A)
397.0
-
641.2
265.1
116.4
210.0
-
-
793.3
SME
(B)
619.2
28.0
-
225.9
-
-
225.3
870.4
-
2,780.4
Total
(A+B)
1,016.2
28.0
641.2
490.9
116.4
210.0
225.3
870.4
793.3
2,780.4
Total
Loans
5,714
254
9,937
6,453
2,068
2,197
1,192
6,545
4,255
21,999
% of
total loans
17.8%
11.0%
6.5%
7.6%
5.6%
9.6%
18.9%
13.3%
18.6%
12.6%
Source: MOFSL, Company
NPA for medium segments
has been witnessing an
increasing trend
Exhibit 4:
NPA trends across different segments; Medium segment NPA stands at 18.7%
Very Small
17.3%
Micro-1
17.1%
Micro-2
Small
17.1%
12.0%
10.4%
8.1%
Medium
18.1%
18.7%
16.7%
16.0%
17.0%
16.2%
11.1%
10.4%
7.9%
10.5%
9.8%
7.7%
11.6%
11.5%
10.3%
7.9%
11.7%
10.4%
8.1%
10.7%
9.8%
7.5%
11.9%
10.8%
8.2%
11.3%
11.1%
10.4%
8.1%
8.4%
Source: MOFSL, Transunion CIBIL
13 May 2020
3
 Motilal Oswal Financial Services
Sector Update | Financials
NPAs for PSU banks stand at
~3x of private banks
Exhibit 5:
NPA for PSU stands much higher at 18.7% v/s ~5% for private banks
PSU Banks
16.6%
16.8%
17.9%
17.8%
Pvt Banks
18.1%
17.3%
NBFCs
18.2%
18.9%
18.7%
7.3%
5.2%
3.0%
5.4%
3.6%
5.8%
3.7%
4.9%
4.7%
4.0%
5.8%
4.1%
6.6%
4.3%
7.6%
5.0%
3.5%
3.8%
Source: MOFSL, Transunion CIBIL
Exhibit 6:
Change in MSME classification
Existing MSME Classification
Criteria : Investment in Plant &Machinery or equipment
Micro
Small
Investment <INR2.5m
Investment <INR50m
Investment <INR1m
Investment <INR20m
Revised Classification of MSMEs
Composition Criteria : Investment and Annual Turnover
Micro
Small
Investment <INR10m &
Investment <INR100m &
Turnover <INR50m
Turnover <INR500m
Classification
Mfg. Enterprises
Services Enterprises
Medium
Investment <INR100m
Investment <INR50m
Classification
Manufacturing & services
Medium
Investment <INR200m &
Turnover <INR1b
Source: PIB
Exhibit 7:
Details of 16 measures announced today (May 13, 2020)
Sector
Details of measures announced
Collateral-free automatic loans to standard MSMEs (Turnover <100cr, and outstanding loans of
nd
<25crores) of four-year tenure available up to 31 October 2020; Principal payment to begin from 2
year (Emergency credit line)
Subordinate debt for NPAs/stressed MSMEs (partial credit guarantee to banks by Credit Guarantee
Trust, CGT)
MSMEs
Fund of Fund created for infusing equity (potential and viable businesses)
Expansion of MSMEs definition
No global competition is allowed in any government procurement up to INR2b
E-market linkages to be provided all MSMEs (Trade fairs/exhibitions) and all receivables to MSMEs by
GoI or CPSEs will be cleared within the next 45 days
Special Liquidity Scheme in investment-grade debt paper of NBFCs/HFCs/MFIs; fully guaranteed by GoI
NBFC/HFCs/MFIs
Partial credit guarantee scheme for NBFCs; First 20% loss will be borne by the GoI (AA and below rated
papers including unrated papers)
Employees PFs
(EPFs)
Discoms
Contractors
Real estate
Liquidity relief for all EPFO establishments (extend the support by another three months (Jun-Aug’20))
PF contribution of both employers and employees (not covered in the first point) reduced from 12%
earlier to 10%; Not applicable to CPSEs/State PSUs (increases take-home pay)
Emergency liquidity injection by PFC/REC to DISCOMS for discharging liabilities to Gencos; Guaranteed
by States
Extension of up to 6 months without any costs and govt agencies to partially release bank guarantees
RERA timelines to be extended by 6 months or 9 months if needed
Estimated cost
(INR b)
3,000
200
500
n/a
n/a
n/a
300
450
25
68
900
n/a
n/a
Direct tax
measures
No relief to salaried class; TDS for non-salaried and rates of TCS for the specified payments reduced by
500
25%
Pending refunds to Charitable trusts and non-corporate businesses/professionals shall be issued
n/a
immediately
Compliance-related relaxation (due date on income-tax return, Tax audit, Date of assessments and
n/a
Vivaad se Vishwas scheme extended)
Source: Government of India (GoI), MOFSL
13 May 2020
4
 Motilal Oswal Financial Services
Sector Update | Financials
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within
following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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13 May 2020
5
 Motilal Oswal Financial Services
Sector Update | Financials
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www.motilaloswal.com.CIN
no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,
Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:
INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company
Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth
Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is
a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.
Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.
Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no
assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance
Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench.
13 May 2020
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