While delinquencies in the MSME portfolio of lenders – bank and finance companies – have declined substantially till September 2022, they need to use the “Early Warning Signal” to spot stress and take preventive steps. Reacting to an account currently in the Days Past Dues (DPDs) bucket may be a delayed reaction, according to credit bureau CIBIL.
Overall, MSME NPA rates under new criterion for delinquency (90+DPD) was 3 per cent for Sep 2022 (Q2Fy23), down from 4.4 per cent same time last year (Q2FY22). The new norms exclude legacy accounts with DPD beyond 720 days or reported as loss/doubtful.
Delinquency rates dropped YoY across all three lender categories – public sector banks, private banks, finance companies. The highest drop was in the private bank segment, from 2.8 per cent in Q2FY22 to 1.5 per cent in FY23-Q2.
The total MSME credit exposure of the lender expanded by 10.6 per cent Year on Year (YoY) basis to Rs 22.9 trillion by end of September 2022 (Q2Fy23). This excludes default cases of about Rs 1.2 trillion in doubtful category and about Rs 1.3 trillion of those with 720 plus DPD or those in loss category.
Credit to the ‘micro’ (with aggregate credit exposure not exceeding Rs one crore) segment by balance grew by 13 per cent YoY as of Sep ’22 vis-a-vis 10.6 per cent YoY growth for overall MSME. Very small (upto Rs 0.1 crore) segment showed 20 per cent YoY growth. The pace of loan growth for exposure between Rs 0.1-0.5 crore was 15 per cent and Rs 0.5-1.0 crore was 11 per cent.
The sudden spurt in Micro lending was not just a post-pandemic bounce back. High growth in the micro segment reaffirms the confidence lenders have in this segment.
According to CIBIL about 93 per cent of MSME entities are in the micro segment which contributes 25 per cent to the MSME portfolio. Lenders are able to capture more data due to formalization of MSMEs and their adoption of platform-based banking services. This makes credit processing and loan delivery seamless, and makes underwriting and debt collection more granular, boosting confidence of financial institutions. Most large banks are capitalising on this trend and are tying up with Fintechs to augment such capabilities.
MSME lending is moving towards being granular and replicating a platform based consumer lending landscape and innovative solutions are required to track the performance of an underwritten entity. Reacting to an account currently in the DPD bucket may be a delayed reaction as there are other indicators which could signal potential default in the near future.
Therefore, EWS becomes an inseparable part of credit risk management plan and allows lenders to take preventative actions. Adoption of such innovative solutions can assist lenders mitigate risk on timely action, CIBIL said.