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Government bailout reduces NPL risk from SME lending

The recovery of demand will be essential; aid to NBFCs is inadequate; PSUs have higher SME and IIB & SHTF, CV/SME loans.

Government’s first bailout may reduce NPL risk of SME lending – 12-14% of credit and lower profile. Rs 3 billion government guaranteed loans represent 15-20% of this credit and will be easier to execute. While we were expecting an RBI-led debt restructuring plan for all, this is a bit better than expected. Rs 750 billion refinancing lines to NBFCs (2% of loans) may be inadequate and a bit complex. In our coverage, PSUs have a higher EMS; IIB & SHTF have higher CV/SME loan.

Conveniently designed small business package
In the first batch of government rescue packages for the economy worth 6 trillion rupees, half are lines of finance for SMEs. Those units having borrowed up to 250 million rupees as of February 29, 2020 can apply for an additional 20% credit from banks/NBFC for a term of 4 years and a moratorium of 12 million on principal. Our conversations with lenders indicate that (i) the collateral line size is reasonable; (ii) government credit guarantee will give confidence to lend as banks have cash to lend – Rs 7-8 trn surplus with banks; and (iii) the package must be easy to implement. Framework details are expected – especially if they can be used in segments such as CV/LAP loans.

Mitigates NPL risk for banks; demand support is essential
SMEs represent 12 to 14% of the credit system and we understand that this package can affect 15 to 20% of them in value. Therefore, this should reasonably reduce the liquidity risk for SMEs and therefore the asset quality risk for banks and NBFCs. As noted in a previous report, we expected RBI to offer a restructuring facility to all borrowers which would have helped reduce bad debt pressure and/or delay recognition. This liquidity support for SMEs is expected to alleviate asset quality pressures in SME lending, CV lending as well as LAP segments. Improving demand will now be essential, especially since these borrowers will now be 20% more indebted.

Liquidity lines to small and complex NBFCs
We believe that Rs 750 billion of liquidity lines to NBFCs (of which Rs 100 billion existed in one form or another) is relatively low as it equates to ~2% of the loan book and might be a bit complex to implement. It’s because
(i) details of qualified companies are awaited; and (ii) it will involve coordination between the nodal agency and the banks. Moreover, if NBFCs are to extend additional lines of financing to SME borrowers, they will also have to raise funds in the market – which remains tight for most of them.

Discom loans can drive PFC/REC growth
Additional funding lines by PFC/REC to discoms will be backed by state government guarantees and Rs 900 billion of loans can add around 15% to loans and reduce immediate risk, but the spreads could be small.

Main beneficiaries
In our coverage, PSUs have a higher EMS; IIB & SHTF have higher CV/SME loan; any MFI/borrower specific package can help IIB.

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