Cloud of farm loan waiver looms over stocks in microfinance sector

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For the first time in many years, the most favoured stock in the financial services space – Bharat Financial Inclusion (BFIL) – posted a gain of less than five per cent in 2018. This is its weakest stock price movement since demonetisation.

Fortunes also don’t seem to favour last year’s initial public offering from the microfinance (MFI) sector – that of CreditAccess Grameen; it trades marginally below its listing price. 

Surprisingly, this is despite the operational environment turning more positive than before for the MFI sector. Recent data by Microfinance Institutions Network (MFIN) highlights a marked improvement in collection efficiency during Q2 compared to the year-ago trend.

Yet, Ujjivan Financial Services, while announcing its September quarter (Q2) results, sounded cautious on the sector. For Ujjivan, 84 per cent of its assets under management or AUMs are MFI loans, and it is among the top five players in the sector. 

There are two key factors which explain the cautious approach of certain companies and the stock market.

For one, despite some key collection parameters showing signs of improvement, these are still far behind the near-zero bad loan days prior to demonetisation. 

Therefore, while to a large extent stability has set in on collection and recovery, it doesn’t paint a crystal clear asset quality image. For BFIL itself, despite Q2’s gross non-performing assets (NPA) ratio at 0.4 per cent, it still has some ground to clear to meet its FY15-16 levels. 

To compound the problem, one needs to see how the recently announced farm loan waiver dampens the payment behaviour of customers. Rajasthan and Madhya Pradesh, the two key states where farm loan waiver was the major election propaganda, accounts for 10 per cent of BFIL’s total loan book. CreditAccess also has reasonable presence in the two regions. 

A report by Edelweiss notes that the two states along with Chhattisgarh account for 13 per cent of overall agricultural credit. “Rural wage growth seems to be a primary driver of delinquencies in the agri-segment, though there is some impairment in credit discipline due to waivers,” the note adds. Analysts say Q3 results should throw light on impairment of credit discipline. Until then, MFI stocks may remain range-bound.

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