Detailed Rationale

CRISIL Ratings has assigned ‘CRISIL AAA/Stable’ ratings to Rs 35,000 crore of Non-Convertible Debentures (NCDs) of Small Industries Development Bank of India (SIDBI) and reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on existing debt instruments of the entity.

 

The ratings continue to reflect the support that the bank receives from the government of India (GoI) because its pivotal public policy role in India's micro, small and medium enterprises (MSME) sector. The ratings also factor in the bank’s robust capitalisation and healthy resource profile. The asset quality in the direct finance portfolio, though improving, remains weaker than that of the refinance book.

 

The bank's portfolio grew to Rs 4,84,933 crore as on March 31, 2024 from Rs 3,77,996 crore a year earlier, marking a year-on-year (y-o-y) growth of 28%, on a consolidated basis. Indirect finance book accounted for 94% of this overall portfolio (80% refinanced to Banks, SFBs and FIs;12% refinanced to NBFC’s and 2% refinanced to MFI’s) and direct finance accounted for the remaining 6%. On a standalone basis, the loan portfolio stood at Rs 4,56,015 crore as on March 31, 2024, as against Rs 3,56,439 crore a year earlier. Over the first six months ended September 30, 2024, however, the loan portfolio dipped marginally to Rs 4,55,564 crore driven by a decline of 0.7% in indirect finance book.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SIDBI, and its subsidiaries given the operational, managerial and financial linkages among the entities. Furthermore, the ratings continue to factor in the expectation of strong support from the government.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Continuation of strong support from the government given SIDBI’s key public policy role in India’s MSME sector

SIDBI plays an important role in channeling finance to MSMEs and implements government initiatives for MSMEs, which is a major driver for India’s manufacturing output. In addition, Micro Units Development and Refinance Agency (MUDRA), which lends to micro/small business entities, has been set up as a wholly owned subsidiary of SIDBI.

 

SIDBI played a pivotal role in implementing the different schemes of the government and the RBI to support the MSME sector after the pandemic. Since the onset of Covid-19, the RBI has allotted Rs 46,000 crore under three tranches of SLF to support MSMEs. Furthermore, SIDBI enhanced the scope of its current schemes, such as SIDBI Make-in-India Soft Loan Fund for Micro Small and Medium Enterprises and SIDBI Assistance to Facilitate Emergency response against Coronavirus, to support the MSMEs affected by pandemic-induced lockdowns. Subsequently, SIDBI has been instrumental in implementing schemes like EVOLVE, cluster development scheme, PM Vishwakarma, PM Swanidhi and others which were launched with the objective of supporting the growth, expansion and formalisation of the MSME sector.

 

The government is likely to continue supporting SIDBI given its role as the nodal agency for implementing public policies and channeling credit in the MSME sector.

 

Robust capitalisation

Capitalisation is supported by sizeable standalone networth of Rs 35,036 crore as on September 30, 2024, and Rs 31,717 crore as on March 31, 2024. On a consolidated basis, networth was Rs 34,147 crore as on March 31, 2024. Standalone overall capital adequacy ratio (CAR) was healthy at 19.5% as on September 30, 2024, having increased from 15.9% as on March 31, 2024 - lead by stipulated adoption of BASAL III norms for calculation of risk weights with effect from April 2024. On a consolidated basis, the overall capital adequacy ratio was 17.9% as on March 31, 2024.

 

Asset-side risks were adequately covered, with nil networth to net non-performing assets (NPAs) ratio as on March 31, 2024 (as net NPAs were negligible) on a consolidated basis as against 3,272 times, a year prior.

 

Subsequent to implementation of BASAL III guidelines from RBI with effect to April 1 2024, the minimum leverage ratio prescribed is 4 times which translates to around 24 times of Tier 1 capital, vis-à-vis earlier approved limited of 18 times of NOF (net own funds) by RBI for SIDBI. On March 31, 2024, the leverage ratio (including deposits) stood at 15.0 times (both consolidated and standalone) whereas on September 30, 2024, leverage was 13.5 on a standalone basis.

 

Healthy and diversified resource profile

Borrowings (including deposits), on a consolidated basis, were Rs 5,11,961 crore as on March 31, 2024 (Rs 4,00,604 crore as on March 31, 2023), of which deposits and bonds/debentures formed 47% and 19%, respectively. On September 30, 2024, borrowings (including deposits) were Rs 4,73,192 crore. The bank has access to funds at low interest rates under the special refinance schemes of the RBI. Resource profile has remained supported by stable traction in deposits allocated under the MSE refinance fund of SIDBI.

 

Cost of borrowings for the bank was 5.2% (based on average of year-end numbers) in fiscal 2024 against 4.1% in fiscal 2023. While there was a slight uptick in the same to 6.0% during six months ended September 30, 2024 owing to the tail effect of macro interest rate scenario, SIDBI continues to mobilise funds at competitive rates.

 

Weakness:

Asset quality for the direct finance portfolio, though improving, remains a monitorable

Asset quality metrics of direct finance portfolio were impacted in prior years owing to slippage of a few large ticket exposures. However, SIDBI wrote off these legacy stressed accounts in fiscal 2022 and since then, NPAs from the direct finance portfolio have been stable and low.

 

As on September 30, 2024, GNPAs for the direct finance portfolio stood at 0.32% (standalone) whereas for the indirect finance portfolio – GNPA was even lower at 0.01% (standalone) on the same date. At an overall level, GNPA stood at 0.01% on September 30, 2024 as against 0.02% and 0.01% on March 31, 2024 and March 31, 2023.

Liquidity: Superior

The asset liability maturity profile as on September 30, 2024, is well matched across most buckets except the 0-6 months bucket where there is a negative cumulative gap. This gap is expected to be covered by uninterrupted rollover of liabilities during those respective time buckets. 

 

As on October 31, 2024, SIDBI had total liquid investments of Rs 72,784 crore in the form of cash and bank balance (Rs 19,595 crore) and investment in government and other securities (Rs 46,814 crore). This balance excludes the benefit of inflows through scheduled collections. Against this, the scheduled debt obligations for the succeeding 3 months (November 2023 to January 2025) were Rs 89,877 crore.

Outlook: Stable

SIDBI is likely to continue to receive operational and funding support from the government and will maintain healthy capitalisation and resource profile over the medium term.

Rating Sensitivity Factors

Downward factors

• Any change in the support philosophy of the GoI or decrease in government shareholding, directly or indirectly (through quasi-government entities), below 51%
• Sharp weakening of the asset quality affecting profitability and capital levels

About the bank

SIDBI was incorporated as a wholly owned subsidiary of IDBI Ltd in 1990. It is the apex financial institution for the MSME sector. Government of India (20.85%), State Bank of India (15.65%), Life Insurance Corporation of India (13.33%) and National Bank for Agriculture and Rural Development (9.36%) are its majority shareholders.

 

SIDBI provides refinance to banks, state financial corporations and state industrial development corporations that lend to units in the MSME sector. SIDBI also provides direct finance to the MSME sector by way of long-term loans, working capital facilities and discounting/rediscounting bills of exchange. As on September 30, 2023, SIDBI had three wholly owned subsidiaries: SIDBI Venture Capital Ltd (SVCL), SIDBI Trustee Co Ltd (STCL) and MUDRA. MUDRA was established by the government through a statutory enactment and is responsible for developing and refinancing all institutions that lend to micro/small business entities engaged in manufacturing, trading and service activities.

 

SIDBI, on a consolidated basis, reported lower profit after tax (PAT) of Rs 5,767 crore on total income (net of interest expense) of Rs 10,332 crore in fiscal 2024, compared with Rs 3,931 crore on total income (net of interest expense) of Rs 6,845 crore in the previous fiscal, on the back of lower net interest margins. Return on assets (RoA) for fiscal 2024 stood at 1.2% (1.1% in fiscal 2023).

 

Growth in the asset book as well as a rising interest rate cycle benefitted profitability, resulting in higher PAT for six months ended September 30, 2024, at Rs 3,324 crore; against Rs 2,166 crore of PAT reported for the corresponding period of previous fiscal, on a standalone basis. RoA stood  at 1.3% and 1.1% for the respective periods.

Any other information: Not Applicable