Trends in commercial creditJune 2014-March 2016

Micro loans show promise, SME credit exposure signals caution

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Analysis done on CIBIL’s commercial database suggests thatCurrently some banks tend to have analytical and strategic focus on 5 or at most 10 states and may not be fully sensitive on industry credit profile divergences. For eg. while Rajasthan has lowest commercial credit NPA rate it also has lowest loan growth and exposure to commercial credit.Banks also tend to avoid be-spoke high risk/ high NPA industries across exposure class and across regions.In both these approaches a bank is unable to optimize its lending strategy and either under lends in industry-geographical clusters which show much lower default rate than the rest of the industry nationally or rest of the geography. Likewise focusing on few states deprive lenders of the opportunity to exhibit calibrated loan growth.

Trends indicate a slowdown in the overall commercial sector loan growth in recent period. The lowest growth rate has been observed in the MID segment which grew at a CAGR of 6%.

Real Estate and Construction has observed increased loan growth whereas Leather, Textile and Steel are the most risky industries with around 15% NPA rates.

In Micro Segment, Rajasthan has the lowest NPA rate (as of FY16) of 2%. While Gujarat, Haryana and Madhya Pradesh have sub 5% NPA rate in this segment. However, only Gujarat is among the top 5 states in terms of exposure to this segment.

Banks and credit institutions focusing on these segments of commercial borrowers can take better decisions with respect to targeted loan growth by focusing on the industry-geographical cluster credit profile.

While the Credit Industry has been focusing on these two segments to overcome their commercial loan growth blues, the NPA Rate trends these two segments have to watched carefully:Micro segment NPA rates are currently range bound between 6.0% and 6.5%.SME segment NPA rate has been moving upward from 8% level to around 11% level.

However the loan growth has been significant in the Micro and SME segment (Exposure Less than INR1.0 Cr/10 Mn) which grew at impressive 17% CAGR and SME1 segment at 12% CAGR. One of the key drivers of Micro and SME segment loan growth is the banking sector’s focus on MUDRA Loans. Together these two segments account for approximately one-third of commercial credit.

SLOWDOWN

GROWTHSEGMENTS

NPARATES

INFORMATIONINSIGHTS

STATE WISENPA RATES

INDUSTRY WISENPA RATES

ANALYTICALINFERENCE

EXECUTIVE SUMMARY

Sequential Slowing of Commercial Sector Loan growth

INTRODUCTION

Overall commercial sector loan growth for Q4 FY16 has been around 9 %(Y-o-Y). The LargeExposures1 which account for close to half of Indian banking’s commercial exposure in Q4FY16 has grown at 10% (y-o-y). The lowest loan growth in Q4 FY16 is observed in the MidExposures1 where the y-o-y loan growth is at 6%. Mid1 sector accounts for around one-fifth of the commercial banking exposure of Indian banking system.

For the full year FY16 the banking sector’s commercial exposure grew at slightly above 12%, with large exposures growing at over 12% and ‘Mid’ at around 10%. Q4 FY16 observed a moderation in loan growth and early signals tends to suggest limited chances of meaningful recovery in overall commercial loan growth.

Micro (Commercial) Loan Growth Surges: However, the bright spot in commercial lending is provided by the Micro Loans and SME Loans. Micro loans which account for 7% of the overall exposure has been growing at a pace of 17% Y-o-Y, while SME loans which account for around one-fourth of the banking book has been growing at 12% (y-o-y).

LARGE Exposure: Above INR 100 Cr(1.0 Bn); MID Exposure: INR 25 Cr(250 Mn) to INR 100 Cr(1.0 Bn); SME Exposure: INR 1.0 Cr(10 Mn) to INR 25 Cr(250 Mn);MICRO Exposure : Less Than INR 1.0 Cr(10 Mn)

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Commercial Loan by Exposure Size

MICRO SME MID LARGE

Large Exposure Forms ~44%-45%

MICRO COMMERCIAL LOANS SHOW MORE PROMISE

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MICRO SME MID LARGE Total Commercial Exposure

Commercial Sector Loan Growth (Quarterly,Y-o-Y Comparisons) Micro and SME Loans driving loan growth

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NPA rates on Micro Loans stable: In terms of NPA rates, micro loans usually made available to the smallest of businesses have shown a steady NPA rate in the range of 6% to 7% with very limited deterioration post March 2015.

Among the highest relative deterioration was exhibited by large exposures and mid-sized exposures. In case of large exposures whose NPA rates ranged from 2.7% to 3.0% prior to March 2015 has shot-up to around 5% by March 2016.

Top 5 states namely Maharashtra, Tamil Nadu, Andhra Pradesh, Gujarat and Uttar Pradesh account for 47% of the banking sector’s exposure to Micro Segment. Among the top 15 states, Rajasthan has the lowest NPA rate(as of FY16) of 2% for this segment. Gujarat, Haryana and Madhya Pradesh have sub 5% NPA rate in this segment. West Bengal, Odisha and Bihar has among the highest NPA rate in this segment.

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NPA Rates by Exposure SizeMicro Loans' More Steady, SME & Mid at Worrisome Levels

MICRO SME MID LARGE

MICRO LOANS: WHERE ARE THEY GROWING,HOW ARE THEY PERFORMING?State wise Micro Loans Growth

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Commercial Loan to Micro Segment(Top 15 States by Banking' Sectos's Exposure of Micro Loans)

Exposure Growth(LHS) NPA Rate-FY16(RHS)

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The NPA Rate for Micro Segment is well below that of SME segment. Industries such as Agriculture & Forestry, Transport & Storage, Steel & Metal, Textile and Leather & Rubber have above average NPA Rates ranging from 8% to 10.5%. The higher than average NPA rate for some of the states may be explained by higher prevalence of high risk industries/highly cyclical industries in those states.

The top two states namely Maharashtra and Delhi account for close of one-third of the banking systems’ exposure in this segment. As such the top 5 states (including Tamil Nadu, Andhra Pradesh, and Gujarat) account for 54% of the banking system’s exposure in this segment.

SME LOANS: WHERE ARE THEY GROWING,HOW ARE THEY PERFORMING?

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Micro NPA Rate: Top 15 Industry By Exposure

NPA rate as of Mar16

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Commercial Loan to SME Segment(Top 15 States by Banking Sectors' Exposure To SME Loans)

Exposure Growth(LHS) NPA Rate-FY16(RHS)

STATE WISE NPA RATES ON MICRO LOANS

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The lowest NPA rates in SME segment is observed in industries such as Financial Intermediary. Among the most stressed industry sectors in this segment are Steel & Metal, Textile and Chemical.

Disclaimer: This CIBIL Market Insight Report (Report) is prepared by TransUnion CIBIL Limited (formerly, Credit Information Bureau (India) Limited) (TU CIBIL). By accessing and using the Report the user acknowledges and accepts such use is subject to this disclaimer. This Report is based on analysis by TU CIBIL of the collated information, substantially, provided by TU CIBIL’s various member banks and credit institutions (Members). While TU CIBIL takes reasonable care in preparing the Report, TU CIBIL shall not be responsible for errors and/or omissions caused by inaccurate or inadequate information available to it from its Members. Further, TU CIBIL does not guarantee the adequacy or completeness of the information in the Report and/or its suitability for any specific purpose nor is TU CIBIL responsible for any access or reliance on the Report and that TU CIBIL expressly disclaims all such liability. No part of this Report may be distributed, published and/ or reproduced in any form and manner whatsoever without prior written consent of TU CIBIL.

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SME NPA Rate:Top 15 Industry By Exposure

NPA Rate-FY16

2.MUDRA -

Loan amount up to INR 10 lacs is sanctioned under Pradhan Matri Mudra Loan Yojana. Launched on 8th April 2015, MUDRA Bank Yojana has opened its door for small businesses.

GLOSSARY1.Segments are defined as:

Micro: Exposure <` 1 crore SME : Exposure 1 crore to ` 25 crores Mid: Exposure ` 25 crores to ` 100 crores Large: Exposure >` 100 crores

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