Microfinance Industry most vulnerable to lockdown and moratorium

As first order impact, collection cycle may be hit, while lack of moratorium-relief from banks may squeeze out liquidity

Stocks in the microfinance space — whether CreditAccess Grameen or Spandana Sphoorty — and banks with high microfinance institution (MFI) exposure, such as Bandhan Bank, have shed 46–60 per cent in the past one month.

This, despite managements of Bandhan Bank and CreditAccess Grameen repeatedly trying to assuage investor concerns on their business outlook and explaining why a countrywide lockdown may only be a temporary hit on their financials.

In a recent call with analysts, Bandhan Bank said it has stopped fresh disbursements/collections, but has not seen MFI customers dipping into their savings yet. “As a long-term strategy, the bank has already diversified asset portfolio, with the MFI share down to 61 per cent and to fall further to 40 per cent over the years,” said analysts at Emkay Global Financial.

“While all weekly centre meetings, disbursements, and collections are temporarily on halt due to lockdown, employees are maintaining regular connection with customers via phone calls,” analysts at ICICI Securities note after a call with CreditAccess Grameen’s management.

Despite an assuring outlook, large brokerages — whether Kotak Institutional Equities, Axis Capital, Ambit Capital or Credit Suisse — say the MFI sector may be in for a rough ride.

“MFIs are mostly daily-wage earners involved in small-scale business activities and are relatively vulnerable to external shocks, as witnessed during demonetisation. A prolonged period of lockdown or drop in overall business volumes can impact credit offtake,” analysts at Kotak Institutional Equities note.

Among noted entities with MFI exposure, Bandhan Bank thus far has seen the harshest downgrade, with Ambit Capital reducing its target price by 84 per cent to Rs 65 apiece (from Rs 395 earlier), though maintaining its ‘sell’ rating.

“The change in target price has been driven by our expectation of losses in 2020-21 and single-digit return on equity over the next four-five years,” the brokerage adds. That said, analysts at Bernstein feel Bandhan Bank is the most resilient franchise within the microfinance space, as its lending isn’t consumption-based and it doesn’t lend to migrant workers.

Apart from business disruption, the MFIs operating as non-banking financial companies — CreditAccess Grameen and Spandana Sphoorty — within the listed space may have more worries. It is gathered that MFIs have represented to the regulator that their banks aren’t extending the benefit of a moratorium on loans due, while they have passed on the gains of the moratorium to their customers. In such a situation, with cash flows not accruing, the sector faces risks of a liquidity squeeze.

Bank-led MFIs such as Bandhan (or RBL Bank or IndusInd Bank, where share of MFI loans isn’t as high as Bandhan’s) may be better placed, as they have the option of raising deposits and tapping the capital market for a fund-raise. However, whether their MFI businesses continue to enjoy the rating they currently do may be questionable if the potential for the MFI business faces near- to medium-term challenges.

From an investor standpoint, despite the steep correction in MFI stocks, one shouldn’t remain optimistic on the sector’s outlook. Reducing exposure to these stocks, wherever possible, may be prudent.