Banks, NBFCs with MSME play may attract investors

Mumbai: A raft of government measures aimed at giving banks and shadow lenders the comfort of federal guarantees while financing small businesses should help increase fund flows to the micro, small and medium enterprises (MSMEs) — businesses that generate jobs in the hinterland and plug key supply chain gaps at giant companies.
Furthermore, direct liquidity flow of Rs 30,000 crore to investment-grade NBFCs and partial credit guarantees to low-rated NBFC papers worth Rs 45,000 crore should help resolve near-term liquidity issues of the NBFC sector.

“We see this as a positive for banks and NBFCs having sizable exposure to SMEs, as the measures will reduce asset quality risk in the SME segment,” said Pradeep Agrawal, analyst, PhillipCapital.


“Moreover, investment-grade NBFCs are given special liquidity lines, which will encourage banks and mutual funds to invest in relatively low-rated paper at a time when liquidity has dried up in this segment due to risk aversion.”

Beneficiaries of the federal measures include DCB Bank, Federal Bank, City Union Bank, Shriram City Finance, Shriram Transport, Cholamandalam Investment and Magma, Agrawal said.

Shriram City Finance has an exposure of 57 per cent to SMEs while DCB Bank and City Union Bank’s loans to SMEs are about 52 per cent and 33 per cent, respectively. Federal Bank and Cholamandalam each have investment exposure of 24 per cent to SMEs.

The standout measure was to provide 100 per cent credit guarantee for loans given to MSMEs. This should urge banks into action and start deploying surplus liquidity to MSMEs. The broadening of MSME definition should also increase the universe of likely beneficiaries. The stimulus package would also help banks get some relief as MSME borrowers are more exposed to liquidity and cash-flow issues and would have availed of the moratorium more than other classes of borrowers.

“We believe that the benefit would be more for PSU banks as their NPL (non-performing loans) formation in this segment is materially higher. Private banks have displayed better underwriting in this segment with gains being relatively more for mid-tier banks such as Federal Bank, City Union Bank, DCB Bank, among others,” said Nitin Aggarwal, analyst, Motilal Oswal Financial Services. “Within NBFCs, Shriram City Union Finance, Cholamandalam Investment and REPCO should emerge as the key beneficiaries,” he added.

However, others said that assetside worries continue to weigh. “Asset-side issues continue to remain elevated with a consistent rise in demand for the moratorium (nearly 70 per cent) as well as difficulty arising in collections and recoveries amid the lockdown,” said Jignesh Shial, analyst, Emkay Global.