Equitas, Ujjivan might be safer bets than BFIL

The Street is bracing for an elevated asset quality stress for MFIs

Not all seems to be fine with the micro finance institutions (MFIs), after the note ban. MFIs are batting for another repayment extension for customers whose loans instalments were due from November 1- December 31, 2016. The Street is also expecting elevated asset quality stress for MFIs. 

An analyst call conducted by Bharat Financial Inclusion (BFIL) on March 6, suggests that not all is well with the financier. After the call, analysts at Credit Suisse said the two months' overdue and unrecognised managed portfolio was roughly 17 per cent of BFIL’s net worth. An analyst with a foreign brokerage says there are little chances of an asset quality improvement for BFIL even after a month from the call. 

A recent report by Religare Institutional Research, however, highlights the Reserve Bank of India (RBI) has directed banks to collect and share a database of self-help group (SHG) members with credit information bureaus from July 2016. The objectives are to uncover the prevalence of over-leverage and multiple-source borrowing, and weed out those borrowing from SHGs to repay to MFIs. While this is long-term positive, the move may restrict near-term growth and asset quality. So for investors, a switch from BFIL (a pure-play MFI) to small finance banks (SFBs) such as Equitas or Ujjivan may bode well.

Equitas plans to reduce the MFI loan book to 25 per cent in FY18 from 49 per cent level. It plans to increase the number of branches by 412 by June 2017, thus rending justice to its SFB licence. While, the same would entail higher operating costs, it is an investment in the long run. Analysts at HDFC Securities, factor in a near 500 basis point increase in cost-to-income ratio (68 per cent in FY18 versus 63 per cent in December ’16). Return on assets, too, may moderate by 70 basis points to 1.71 per cent in FY18 from the current 2.5 per cent. But, despite this, the analysts say, the SFB conversion would make growth sustainable and arguably superior to vanilla micro-finance with cost and franchise benefits.

A similar argument plays out for Ujjivan. While Ujjivan has 85 per cent exposure to MFI loans, the risk is mitigated given its operations spread over 24 states. The financier is looking at building traditional credit products similar to that of Equitas, though individual borrowers would remain its focus. Yet, both the financiers are well-positioned to tap the advantage of cheap funds as the liability mix (deposits) improves in the coming years. Analysts currently expect Ujjivan and Equitas to witness 100 basis point reduction in cost of funds in FY18 and 150-250-basis-point decline by FY20 as branch operations ramp up. Trading at 2.7x FY18 price-to-book, both the stocks look attractive compared to BFIL’s 3.3x.