Auto MSMEs showing early signs of delinquency

Trends in delinquencies tend to vary depending on auto clusters across different geographies.

By:Published: October 28, 2019 8:29:54 AM

The broad-based slowdown in the auto sector is leading to credit quality of medium and small enterprises of the sector. While the credit quality of micro, small and medium enterprises (MSMEs) in the auto sector continues to fare better than some others, slowing demand and building stress is leading to a higher rate of delinquencies in the sector.

While the auto sector may still have a lower rate of NPAs, the MSME Pulse report for Oc-tober by TransUnion Cibil says that the NPA ratio may be a lag indicator to understand sectoral risk. In order to understand auto MSMEs, the report has attempted to look into the transition matrix of these MSMEs based on CIBIL MSME Rank (CMR).

It has split MSMEs into three buckets basis their risk profile. Those MSMEs with a credit score output values CMR-1 to CMR-3 are considered lowest risk, CMR-4 to CMR-6 are considered medium risk and CMR-7 to CMR-10 are the highest risk. The transition matrix for auto industry MSMEs between June 2017 to June 2018 had 2-notch downgrades in CMR-1 to CMR-3 between 12% to 15%; this has increased from 14% to 24% in the June 2018 to June 2019 period.

Though the underlying risk for the MSMEs in the auto industry may be increasing, at an overall level CMR distribution for the auto industry MSMEs is positively skewed towards better CMR grades. About 45% of MSMEs in the auto industry belong to CMR-1 to CMR-3 compared to 38% for MSMEs in other industries. In order to understand the impact on the MSMEs operating in auto industry, it is important to contrast their performance with some of the other industries in the country, says the MSME Pulse report. “The recent economic events impacting auto industry MSMEs have made it tough for MSMEs in this industry to stay super prime for credit quality (CMR-1 to CMR-3), but still this sector has better overall credit health MSMEs than some other industries in the country,” the report stated.

Trends in delinquencies tend to vary depending on auto clusters across different geographies.

Some clusters show higher deterioration than others. Auto MSMEs in Ludhiana, Rajkot, Kolkata, Tiruvallur, Kanchipuram, Vadodara and Surat are in the least deteriorated Group A, while those in Pune, Mumbai, Ahmedabad, Indore, Chennai, Nashik and Hyderabad shall be classified in the next group and the MSMEs in Faridabad, Delhi, Bangalore, Jaipur, Gurgaon, Raipur, Nagpur, Jalandhar and Aurangabad in the most deteriorated Group C. MSMEs in Group A have negligible increase in CMR downgrades. From early signs it is evident that the asset quality is deteriorating among auto ancillaries.

Auto ancillaries have been facing the heat from a historic slowdown in the auto industry, with vehicle sales having plummeted to multi-decade lows. Several auto dealerships, too, have failed to get fresh credit from banks. Those that managed to raise money did so at the cost of high collateral. Analysts expect the situation to worsen for the auto industry. In a recent note, analysts at Nomura wrote that prevailing risks to gross domestic product (GDP) growth mean that recovery in autos will take longer. “The Indian auto sector’s growth is highly correlated with the GDP growth. A sharp economic slowdown and rising cost of vehicles have affected vehicle affordability,” the note said, adding, “The cost of vehicles should rise further due to upcoming BS-6 norms.”

The MSME segment as a whole may have a fair amount of hidden stress. A big chunk of loans to MSMEs — worth some Rs 15,000 crore — could slip over the next eight months. These loans would have turned NPAs a long time ago had the Reserve Bank of India (RBI) not given banks a breather. A June 6, 2018 notification had allowed banks and NBFCs to temporarily classify their exposure to all MSMEs, including those not registered under the goods and services tax (GST), as a standard asset as long as it was smaller than Rs 25 crore and standard as on August 31, 2017. MSME loans worth Rs 7,995 crore had been retained by banks as standard under this central bank notification.

Again, a January 1 circular of the RBI had permitted banks to do a one-time restructuring of existing loans to MSMEs and classify them as ‘standard’ without a downgrade in the asset classification. Consequently, PSBs had restructured 1.53 lakh accounts with an outstanding of Rs 5,194 crore.

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