 "MFIs to face asset quality woes")
Even as concerns over likely pain from the demonetisation move persist, there could be more trouble brewing for microfinance institutions (MFIs), which could weigh on the stocks.
There have been instances of interference by local political leaders in the operations and practices of MFIs, particularly in Maharashtra and Uttar Pradesh. There are also concerns that MFIs could have violated some Reserve Bank norms regarding multiple loans to a single borrower and adoption of unethical recovery practices, among others. The Maharashtra government has set up an investigation team to identify cases of such violations.
All these concerns led to a 3-6 per cent fall in share price of leading MFIs Bharat Financial Inclusion, Equitas Holdings and Ujjivan Financial Services on Tuesday versus a quarter percentage point fall in the S&P BSE Sensex. However, there are reasons for the Street to be worried. In its latest investor communication, Bharat Financial Inclusion has alluded that collections in Maharashtra and UP have come down. Against overall collection efficiency of 91.2 per cent between November 11 and 25, those in Maharashtra and UP have come down to 83 per cent and 74 per cent, respectively. Analysts believe the trend could be similar in the case of Equitas and Ujjivan. While Equitas and Ujjivan have converted to small finance banks, microfinance still accounts for a large part of the operations/revenues.
Most experts believe these larger companies will come out clean as they follow RBI norms diligently. These instances could also increase discipline in smaller, unorganised MFI players. The pressure on asset quality, though, could inch up from here on. “Given the political risks, we can no longer ignore the possibility of some write-offs. However, we remain confident that the current phase is transient in nature and the strong players will endure some collateral damage,” says Digant Haria, an analyst at Antique Stock Broking.
M R Rao, managing director and CEO of Bharat Financial Inclusion, too, believes this asset quality pain will last for a shorter time. “I don’t think we’ll be prevented from interacting with the borrowers. Continued borrower interaction will help reduce the asset quality pressures,” he said.
Investors need not worry about the comparisons being drawn between the present scenario and the Andhra Pradesh MFI crisis a few years ago. This is because the MFI sector is much more regulated now and is governed by RBI. Also, these three players have a smaller exposure to the states of Maharashtra and UP. While Maharashtra forms 12 to 13 per cent of these companies’ loan portfolios, this metric stands at 0-5 per cent for UP.