Pick-up in demand will be key; aid for NBFCs indequate; PSUs have higher SME and IIB & SHTF, CV/SME loans.
Government’s first bailout package can abate NPL risk from SME loans—12-14% of credit and weaker profile.Rs 3 trn of goverment guaranteed loans are 15-20% of this credit and will be easier to execute. While we expected an RBI-led debt restructuring package for all, this is a tad better than expected outcome. Rs 750 bn of refinancing lines to NBFCs (2% of loans) may be inadequate and a tad complex. In our coverage, PSUs have higher SME; IIB & SHTF have higher of CV/SME loan.
Package for SMEs practically designed
In the government’s first batch of bailout package for economy worth Rs 6 trn, half constitutes funding lines to SMEs. These units with borrowing of up to Rs 250 m as of 29-Feb-20 can seek additional 20% credit from banks/NBFCs for 4-year duration and 12-m moratorium on principal. Our conversations with lenders indicate that (i) size of guarantee line is reasonable;(ii) credit-guarantee from government will give confidence to lend as banks have liquidity to lend – Rs 7-8 trn of surplus with banks; and (iii) package should be smooth to implement. Details on the framework are awaited — especially if these can be availed in segments like CV/LAP loans.
Eases NPL risk for banks; demand pick-up is key
SMEs form 12-14% of system credit and we understand that this package can touch 15-20% of them by value. Hence, it should reasonably reduce liquidity risk of SMEs and so the asset quality risk for banks and NBFCs. As discussed in an earlier report, we expected RBI to offer a restructuring facility to all borrowers that would have helped to reduce NPL pressure and/or delay recognition. This liquidity support for SMEs should abate pressures on asset quality in SME loans, CV loans as well as LAP segments. Improvement in demand will now be key especially as these borrowers will now be 20% more levered.
Liquidity lines to NBFCs small & complex
We believe that Rs 750 bn of liquidity lines to NBFCs (of which Rs 100 bn existed in some form) is relatively small as it equates to ~2% of loan-book and could be a bit complex to implement. That’s because
(i) details on qualified companies are awaited; and (ii) it will involve coordination between nodal-agency and banks. Additionally, if NBFCs are to extend additional funding lines to SME borrowers they will also need to raise funds from the market — which remains tight for most of them.
Discom lending can lift PFC/REC growth
Additional funding lines by PFC/REC to discoms will be backed by state government guarantees and Rs 900 bn of lending can add ~15% to loans and reduce immediate risk, but spreads could be low.
In our coverage, PSUs have higher SME; IIB & SHTF have higher of CV/SME loan; any specific package for MFI/borrower can help IIB.