Strong backing by Government of India for development of MSME sector

MSME sector is of significant importance to the Government of India (GoI) given the pivotal role played by the sector in India’s economic growth. The sector accounts for ~40 per cent of the overall exports from India, ~45 per cent of the manufacturing output and contributes nearly 30 percent to GDP. NSIC plays a critical role in promoting and supporting the MSME segment through a combination of commercial activities and implementing Government’s schemes for the sector. Apart from operational and management support, NSIC also benefits from being a 100 percent government-owned entity providing easy access to funding. Apart from regular bank lines, it has also been able to raise long-term funds for up to 40 years from foreign institutions such as KFW, Germany based on sovereign guarantees.
Acuité believes that NSIC will continue to play a key role in the development of the MSME segment and benefit from the strong GoI’s support
 

Diversified revenue streams and comfortable liquidity profile

NSIC provides integrated support to MSMEs by providing raw material assistance, marketing support, credit support, and technology and training activities. NSIC derived ~83 per cent of its operating revenue from the sale of products and services during FY2023. Other revenue streams include interest earned through credit facilities extended for raw material procurement, which accounted for ~10 percent; processing fees ~2 per cent. Further, its income is supported by grants received from the government for implementing promotional schemes.
NSIC extends advances to MSMEs for procurement of raw material against bank guarantees. As per its credit policy, NSIC advances loans of up to 95 per cent of the value of the bank guarantee. The overall portfolio stood at Rs. 2,893.56 Cr. as on March 31, 2023 as against Rs. 2,475.83 Cr. as on March 31, 2022.  Since the exposures are covered by bank guarantees, overall asset quality has been satisfactory. The exposure to a single borrower is up to a maximum of Rs 8 Cr. with 90 days maturity and is rolled over subject to borrowers’ satisfactory credit discipline. Since the exposures are mostly short term in nature, borrowings are also mainly short term borrowings. A major portion of the resources is raised through short term bank lines from a mix of foreign and domestic banks. NSIC has bank limits of ~Rs. 4000 Cr. of which ~40 percent was utilized as on June, 2023. The unutilized lines provide adequate liquidity buffer.
Acuité believes that NSIC will maintain a stable credit profile on the back of its diversified product mix, a prudent policy of lending against bank guarantee and availability of adequate liquidity cushion.

Future growth prospectus linked to GoI support amidst increasing competition in key revenue segments

NSIC largely depends on government’s budgetary allocation for promotion of various government schemes. The quantum of grants and subsidies from the government is a key determinant of its operational performance. Further, NSIC derives a major part of its revenue through its raw material assistance scheme. It acts as an aggregator procuring raw material such as coal, iron, steel, cement and paraffin among others from government companies including Coal India Limited, Steel Authority of India Limited, Hindustan Copper Limited in bulk and provides the same to MSMEs at competitive rates. The emergence of private players with similar business models adds to the competitive intensity of this segment. The increasing number of banks and NBFCs focusing on SME lending further adds to the increasingly competitive landscape. NSIC reported total income of Rs. 468.01 Cr. for FY2023  as against Rs 422.27 Cr. for FY2022.
Against the backdrop of increasing competition in its key revenue segments like raw material procurement, NSIC will have to depend on other government-funded schemes to scale up its revenue and profitability. Hence, Acuité believes that the level of government support will be a key driving force for NSIC’s future growth.