Important RBI's guideline to boost MSME sector post GST implementation

Important RBI's guideline to boost MSME sector post GST implementation 

RBI's guideline on increasing the NPA recognition time to 180 days from currently 90 days

for banks and 120 days for NBFCs aims at giving much need boost to the MSME sector

post the launch of GST. It couples with the recent budget announcement on tax-relief for

MSME sector. While the new RBI guideline aims at supporting credit access to MSME

sector, many are unclear about the exact benefit of this guideline to MSME borrowers and

the banks.

TransUnion CIBIL has attempted to ascertain the benefit of the guideline by identifying

who are the impacted MSME borrowers. Though, RBI definition to classify MSME is based

on GST registration till 31st Jan 2018 and aggregate credit exposure not exceeding Rs 25 crores. The study is based only on the credit

exposure criteria with an assumption that all the eligible MSME borrowers are GST registered by 31st Jan 2018.

MSME borrowers that are entitled to benefit from the guideline should be classified as Standard by banks and NBFCs as of August 2017

and have aggregate credit exposure not exceeding Rs 25 crores. A total of 30.4 lakh MSME borrowers satisfy this condition. But, about

5% of them i.e. 1.4 lakh borrowers have already been classified as NPA by a bank or NBFC as of January 2018. These 1.4 lakh

borrowers will now be classified as Standard under the guideline and will only move back to NPA if their overdues cross the 180 day

mark. Meaning all the 1.4 lakh will continue to be Standard in March 2018 reporting even if they don't pay any dues.

These 1.4 lakh MSME borrowers had a credit outstanding of Rs 12,910 crores as of January 2018. On these set of borrowers assuming

in normal circumstances banks would have kept an average NPA provisioning of 50%, though provisioning norms are different across

banks and depend upon many different things, but to arrive at a high-level estimate of benefit assuming 50% average provisioning. The

provisioning requirement for these set of borrowers under the new guideline is

5%. Therefore, a benefit of Rs 5,809 crores in provisioning requirement may be

passed to the banks in the new guideline.

In the remaining 29 lakh MSME borrowers which were Standard as of August

2017 and Standard as of January 2018, there are a set of borrowers which are already high risk and standing at the tip of turning into

NPA. Accessed using CIBIL MSME Rank (a credit score for MSMEs), a total of another 1.7 lakh borrowers are in the risky ranks of

CMR-7 or higher. These 1.7 lakh MSME borrowers have demonstrated early signs of stress, hence CMR-7 or higher and may stop

paying the dues given they will not be classified as NPA until 180 days of overdue.

These 1.7 lakh MSME borrowers have a much larger credit outstanding of Rs 82,008 crores as of January 2018. These borrowers are

not NPA as of January 2018 but are high risk given CMR-7 or higher. On these set of borrowers fitting the CIBIL MSME Rank' probability

of default (PD) curve, one can assume a PD of 6.5% for next 2 months. Translating to 11,050 of probable defaulted MSME borrowers

with credit exposure of Rs 5,330 crores. Hence, the new guideline's provisioning norms will bring a benefit of another Rs 2,398 crores to

the banks attributed to these MSME borrowers.

In net effect we can see about 1.5 lakh MSME borrowers benefitting by the RBI guideline on GST relief and Rs 8,207 crores of

provisioning relief to the banks. Though this guideline will benefit both parties in the short-term but we will have to wait and watch the

impact in the long-term credit culture of these MSME borrowers.

Source of the data used is the credit information submitted by banks and NBFCs in Commercial Bureau of TransUnion CIBIL and CIBIL

MSME Rank, TransUnion CIBIL's credit scoring algorithm for MSMEs