The credit to micro, small and medium enterprises (MSMEs) is expected to grow at 12-14 per cent over the next five years, helped by higher lending by non banking finance companies (NBFC) to the segment, says a report.
As on March 2017, credit to MSMEs stood at Rs 16 trillion.
NBFC and housing finance companies are expected to expand at about 20-21 per cent compounded annual growth rate (CAGR) in this space during the period, while bank credit to this segment, which accounted for about 84 per cent of total MSME credit, is estimated to grow at a lower CAGR of 9-11 per cent, according to a report by Icra.
“Non-banks share in the MSME credit pie should expand to 22-23 per cent by March 2022 compared to 16 per cent in March 2017. Non-banks, with their niche positioning, differentiated product offering, good market knowledge and large unmet demand, would be able grow at a healthy rate vis-a-vis banks,” the rating agency’s assistant vice president and sector head, A M Karthik said.
He added there is large unmet credit demand in the MSME segment, which was estimate to be about Rs 25 trillion in FY2017.
“Notwithstanding the estimated growth, the unmet credit demand quantum is likely to increase further, going forward,” he said.
With large corporate credit expected to remain sluggish, at least over the next one-two years, the bank credit to the MSME segment is expected to be around 9-11 per cent with public sector banks growing at 7-9 per cent and private banks at 16-18 per cent, the report said.
Banking NPAs in the MSMEs segment stood high at about 8.4 per cent in March 2017 while that of non-banks stood at about 3 per cent as on that date.
The report said notwithstanding the moderate seasoning of the portfolio, non-banks have a more flexible and customised credit assessment for this segment and have steadily been moving to lower ticket loans, in view of the asset quality pressure in the large ticket loans and better yields in the smaller ticket loan categories.
“While non-bank asset quality is expected to worsen from current levels, the extent of deterioration may be lower than that witnessed in banks,” the report said.
Official data released on Tuesday showed that demonetisation hasn’t pushed the economy into a retreat as most feared, with its short-term adverse impact. (Source: Reuters)
Official data released on Tuesday showed that demonetisation hasn’t pushed the economy into a retreat as most feared, with its short-term adverse impact to a large extent restricted to construction and financial services. Real GDP growth in the December quarter, in the midst of which the note ban came into effect, came in at a respectable 7% (though lower than 7.4% in the previous quarter) and the gross value added (GVA) was 6.6%, with the difference explained by robust indirect taxes and reining in of subsidies.
Upward revision of GVA estimates for 2015-16 led to downward corrections in GVA for Q1 and Q2 of the current fiscal but despite this, there were marginal upward revisions in the rates of GDP expansion in these quarters, thanks to a surge in indirect taxes.
Solid performance by the “agriculture and allied sectors”, pump-priming by the government on the consumption side, better-than-expected performance by mining and manufacturing sectors and a seasonal — though larger-than-usual — pick-up in private consumption masked whatever negative effect the note swap exercise had on the economy, going by the Central Statistics Office’s data.
However, as the GDP was slowing even before demonetisation and the note swap has indeed had an incremental adverse effect on it, both GDP and GVA growth for 2016-17 have been projected to be much lower than in the previous year. In the second advance estimate, the CSO has kept the GDP growth estimate for the current financial year at 7.1%, the same as in the first advance estimate released in early January, and GVA growth at 6.7%. But given that 2015-16 GDP growth, which was seen at 7.6% at the time of the first advance estimate, was subsequently revised to 7.9%, the CSO’s latest take on 2016-17 growth is virtually more sanguine than its previous estimate.
While the CSO’s GDP estimate for 2016-17 is evidently higher than that of most others, many analysts said the growth assumed by it for the second half (6.8%) was optimistic. “Given the fact that the fall from H1 to Q3 is not much, I don’t think that we should then necessarily assume that the rebound in Q4 is going to be very sharp,” said Aditi Nayar, economist at Icra. Stating that the GDP number is better than expected, Saugata Bhattacharya, chief economist at Axis Bank, said, “Since growth slowdown (due to demonetisation) has been shallower than expected, and in line with the RBI’s projections, the probability of rate cuts going ahead has come down.”
The minutes of the monetary policy committee’s meeting released last week indicated that it changed its stance from “accommodative” to “neutral” because the growth drag from demonetisation is expected to fade soon. India Ratings reiterated its view that “much of the impact of demonetisation will be visible in Q4FY17 leading to an overall GDP growth of 6.8% in 2016-17”.
Economic affairs secretary Shaktikanta Das said: “This year’s GDP (growth) is around 7%, based on available numbers. Nothing can be deciphered on anecdotal evidence. Demonetisation only impacted consumption in some cities, since most purchases happened on credit or debit cards. The so-called negative impact, if relevant, was only temporary.”
The 7% GDP growth forecast for the third quarter helped India maintain the coveted tag of the world’s fastest-growing major economy despite demonetisation, better than China’s 6.8% in the December quarter.
While analysts pointed out the lack of congruity between the CSO’s estimate and other high-frequency data and corporate results, chief statistician TCA Anant said all available data have been made use of in the second advance estimate, including corporate performance up to the December quarter, sales of commercial vehicles, railway freight, etc, for the first “9/10 months of the financial year”.
According to the CSO, with production growth of foodgrains during 2016-17 kharif and rabi seasons being 9.9% and 6.3%, respectively, the farm sector grew a robust 6% in Q3 from 3.8% in the previous quarter and compared with a 2.2% contraction in the year-ago quarter. Despite the anecdotes of industrial clusters hit by the note ban during the period, manufacturing grew a healthy 8.3% in Q3 on a robust base of 12.8% in the year-ago quarter and compared with 6.9% in Q2 this fiscal. Mining also posted a smart recovery from a fall of 1.3% in Q2 to a robust expansion of 7.5% in Q3. The bad performers on the output side was “financial services, etc”, which posted a modest 3.1% growth in Q3 compared with 7.6% in the previous month, and construction which grew just 2.7% in the December quarter.
Government final consumption expenditure (GFCE) posted a 19.9% growth in Q3 against 15.2% in the previous quarter, the CSO said. Given that 17% growth in GFCE is estimated for the whole of 2016-17, it needs to grow at 17.4% in Q4. Considering that the Centre, as is seen from the April-January fiscal data separately released by the Controller General of Accounts, has slowed down spending in the later months of the year, the spending boost must come from PSUs.
Although both Dussehra and Diwali fell in the December quarter, the 10.1% growth reported by CSO in the private consumption expenditure looked puzzling to most analysts (but some said use of old notes for consumption might have contributed to the rise). So was the 3.5% growth in gross fixed capital formation, which was declining for the previous three quarters.
Given that nominal GDP growth has been projected at 11.5% for 2016-17, compared with 10% in the last fiscal, it may offer more leeway to the government to improve spending in the next fiscal and yet contain fiscal deficit, which is expressed as a ratio of the nominal GDP, at the targeted 3.2%.
Discrepancies — the difference between the supply and demand side of GDP — turned negative after a gap of four quarters (-Rs 6,767 crore) in the December quarter, compared with Rs 45,378 crore in the second quarter and Rs 30,645 crore in the first quarter. In the last quarter of 2015-16, discrepancies touched a massive Rs 1,43,210 crore, causing a flutter then and raising doubts about the credibility of the country’s data collection mechanism. When private final consumption expenditure, gross fixed capital formation, government final consumption expenditure, change in stocks, valuables, and net exports exceed the overall GDP (based on the supply side data), discrepancies turn negative.
Analysts expect the exports sector to contribute more to GDP growth in the coming quarters, despite the demonetisation blues, thanks primarily to a favourable base. In real terms, the export growth for 2016-17 has been projected at 2.3%, compared with -5.4% in the last fiscal. Despite demonetisation, merchandise exports rose 2.3% in November, 5.7% in December and 4.3% in January.
India is expected to attract moderate FII inflows of $15-$20 billion in 2018, with headwinds such as the muted outlook for corporate earnings and continued compression in debt spreads relative to advanced economies, rating agency ICRA said in a report on Tuesday.
“With the muted outlook for corporate earnings and emerging sectoral concerns regarding Indian software and pharmaceuticals exports to the US, the net FII equity inflows are likely to be restricted below $5 and $10 billion respectively in FY17 (2016-17) and FY18 (2017-18), in our view,” said ICRA Senior Vice President and Group Head-Financial Sector Ratings, Karthik Srinivasan.
The agency expects aggregate FII debt outflows in FY17 of $6-$8 billion, followed by aggregate inflows of $5-$10 billion during FY18.
“Indian bond yields are unlikely to ease significantly below current levels, given the limited further monetary easing expected from the Reserve Bank of India.
“Moreover, the supply of net long term borrowings of the government is likely to increase in FY2018 from Rs 4.1 trillion in FY2017, as the central government is likely to budget a fiscal deficit range between 3 and 3.5 per cent of the GDP,” he said.
The Indian markets had witnessed record FII outflows of $11.3 billion during Q3 (third quarter) FY17 on the back of a combination of international and domestic factors, including the risk-off sentiment triggered by the outcome of the US presidential election in November 2016 and the tightening of monetary policy by the US Federal Reserve in December 2016.
Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report.
“Asset quality will remain a negative driver of the credit profiles of most rated banks in the country and the stock of impaired loans. Non-performing loans and standard restructured loans will still rise during the horizon of our outlook that lasts till the next financial year,” Alka Anbarasu, a vice-president and senior analyst at Moody’s, said in a report today.
The report is jointly penned by Moody’s and its domestic arm ICRA Ratings.
The report said the pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-12, when corporate investments rose significantly.
It, however, said aside from the legacy issues, the underlying asset trend for banks will be stable because of a generally supportive operating environment.
“While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested,” the report said.
As per Karthik Srinivasan, a senior vice-president at ICRA, “while bank profitability is not expected to be as weak as the levels seen in the financial year 2015-16, the weakness in asset quality will continue to drag on profitability indicators, with return on equity remaining in the single digits for the financial years 2016-17 and 2017-18.”
Anbarasu said the pace of asset quality deterioration over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to the financial year 2015-16.
She considers the Reserve Bank’s asset quality review in December 2015 as an important catalyst in pushing banks to recognise some large accounts as being impaired.
“We now estimate the ‘true’ level of impaired loans for Indian banks to be around 1-1.5 percentage points higher than the latest reported numbers,” Anbarasu said.
The latest Financial Stability Report by the RBI had said the gross non-performing advances ratio increased to 9.1 per cent from 7.8 per cent between March and September 2016, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent.
Moody’s said given the magnitude of stressed assets in the system, it expects the banks to increase their focus on resolving some of the large problem accounts.
“We expect an increased pace of debt restructuring under various schemes offered by RBI, including the scheme for sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR) and the 5:25 scheme,” the report said.
“Nevertheless, weak reserving levels and continued pressure on profitability will limit the ability of the banks to proactively resolve problem assets under these schemes,” Anbarasu said.
Icra said a muted level of credit off-take — on the back of weak demand, increasing competition and greater disintermediation — will continue to exert downward pressure on lending rates.
It said the overall capitalisation levels of most of the public sector banks remain moderate to weak, given that they need to attain the regulatory minimum tier-I requirement of 9.5 per cent by March 2019.
The current plan of infusing Rs 45,000 crore during 2016-17 and 2018-19, of which Rs 16,414 crore have already been infused in the current year, is below ICRA’s estimate of capital requirements of Rs 1,50,000-1,80,000 crore.
The credit to micro, small and medium enterprises (MSMEs) is expected to grow at 12-14 per cent over the next five years, helped by higher lending by non banking finance companies (NBFC) to the segment, says a report.
