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

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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

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

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

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

Sector Update | Financials

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accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;

Website

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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