India Ratings Assigns Small Industries Development Bank of India's CP 'IND A1+'

India Ratings and Research (Ind-Ra) has rated Small Industries Development Bank of India's (SIDBI) commercial paper (CP) as follows:

Instrument Type Date of Issuance Coupon Rate Maturity Date Size of Issue (million) Rating Rating ActionCP - - 7 days to 365 days INR216,000 IND A1+ Assigned

KEY RATING DRIVERS

Apex Policy Agency for MSME Sector: SIDBI was established in 1990 under the Act of Parliament as the apex financial institution for the promotion, financing and development of micro, small and medium enterprises (MSME) sector. In its role, SIDBI extends refinance to primary lending institutions such as banks (including foreign banks), financial institutions, state finance corporations (SFCs), state industrial development corporations and state small industries development corporations against their MSME loan portfolio. SIDBI also extends financial assistance to micro finance institutions in the form of loans, equity/quasi-equity for on-lending to the economically weaker section of society. It also extends direct assistance such as long-term loans, working capital facilities and discounting/rediscounting bills of exchange to the MSME sector.

Strong Sovereign Linkages: Owing to its role, SIDBI has been recognised as the nodal agency for implementing several government of India (GoI) sponsored schemes. Micro Units Development and Refinancing Agency (MUDRA) has been set by the GoI through a statutory enactment and is a wholly owned subsidiary of SIDBI. MUDRA is responsible for developing and refinancing institutions engaged in extending finance to micro and small business. SIDBI has support from the GoI in the form of budgetary allocations/guarantees. Under the provisions of SIDBI Act, its statutory auditors are appointed out of the panel appprovedby the Reserve Bank of India (RBI). The RBI also regularly inspects the books of SIDBI and conducts a complete inspection once in two years.

Supervisory Body: SIDBI, jointly with the respective state governments, acts as a supervisory and inspecting body for SFCs. SIDBI has several rights in decision making and management of these SFCs under the SFC Act, 1951.

Strategic Importance: The GoI, to boost manufacturing output and spur industrial growth, continuously provides low-cost credit to MSMEs through concessional resource support to SIDBI. The MSME sector creates employment of about 117 million across 51 million units and 6,000 products. It contributes 38% to gross domestic product and about 42% to India's exports. By addressing financial and non-financial gaps in the MSME ecosystem, SIDBI complements the efforts of the overall financial system and GoI.

Access to Captive Funding: The resource profile of SIDBI is a healthy mix of domestic and overseas borrowings from bilateral and multi lateral agencies. It has access to low-cost funds from the RBI under Rural Infrastructure Development Fund, created out of deposits from schedule commercial banks due to their shortfall in priority sector lending. This is an important source (32.6% of total in FY17) and Ind-Ra believes this source will continue.

Strong Financial Profile: SIDBI is comfortably capitalised, with its capital to risk weighted assets ratio standing at 30.77% at FYE17 on a consolidated basis. The majority of the income is generated by way of interest income (86.8% in FY17) while net interest income was 2.51% of the average total assets in FY17. This net interest income, however, has moderated from 3.01% in FY16. Despite lending to MSMEs, its non-performing advances (NPA) ratio has been minimal; net NPAs to net loans and advances less than 1% from FY12-FY17. The major reason for low NPAs is the high proportion of SIDBI's advances (FY17: 85.7%) extended for refinancing to banks and financial institutions.

Liquidity Profile Comfortable: The asset-liability profile of SIDBI shows a comfortable liquidity position. Under liquidity buckets from one year to five years, there is a positive gap. SIDBI has a negative gap in liquidity buckets post five years. This is largely on account of derivative transaction exposures.

RATING SENSITIVITIES

Negative: A dilution in SIDBI's public policy institution role of financing and development of the MSME sector, resulting in reduced GoI linkages could be negative for the rating.

COMPANY PROFILE

SIDBI is established under the Act of Parliament- SIDBI Act, 1989. It acts as the principal financial institution for the promotion, financing and development of the MSME sector and for coordination of the functions of the institutions engaged in similar activities. SIDBI has three wholly owned subsidiaries namely SIDBI Venture Capital Ltd, SIDBI Trustee Co. Ltd and MUDRA.

FINANCIAL SUMMARY

Parameters FY17 FY16Interest earned (INR million) 65,084.9 58,790.8Interest expended (INR million) 43,864.7 37,453.9Profit before tax (INR million) 18,630.0 17,481.7Profit after tax (INR million) 12,279.9 12,466.0Capital adequacy ratio (%) 30.77 30.71Gross NPA (closing) (INR million) 8,232.8 10,081.8Net NPA to net advances (%) 0.44 0.73Source: SIDBI

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