Deterioration in credit discipline more detrimental to MFIs than rural focussed NBFCs

Rising instances of farm loan waivers in many states which are facing elections in the next couple years may affect credit discipline of rural borrowers, a development that weighed on the stocks of NBFCs such as Mahindra and Mahindra Financial Services (MMFS), Shriram Transport Finance (STFC) and micro finance players such as Bharat Financial Inclusion ( BFIL) in the last two trading sessions.

However, unlike NBFCs for which the loan is secured in nature backed by assets like tractors, and commercial vehicles and the quantum of loans are bigger, the deteriorating credit culture may be a bigger worry for MFIs that have already seen 20% to 35% correction in the consensus earnings expectations for FY18 in this calendar year.

The management of rural-focused NBFCs appear confident that farm loan waivers are less likely to impact the credit discipline amongst their borrowers even as some may try to take advantage of the prevailing sentiments.




According to Umesh Revankar, MD & CEO of Shriram Transport Finance, even as loan waivers affect rural credit discipline, payment from assets is not a challenge that cannot be handled. He said that while some elements may try to take advantage of the situation, such instances are unlikely to impact the company’s outlook on loan growth (12% to 15% for FY18) and asset quality) for the fiscal.

“Borrowers’ expectations of waivers are from the government and not banks and institutions like us. For our business, cyclical factor like a drought that affected Karnataka and Tamil Nadu last year is far bigger a challenge than change in credit discipline due to such waivers,” said Revankar.

While post demonetisation phase, the cash crunch impacted loan repayments, disbursals, collection efficiency or bad asset levels of rural credit focused businesses, with remonetisation the improvement in these parameters of NBFCs was more evident than MFIs.

For instance, gross non-performing asset ratio of MMFS declined from 11.1% as of December to 9% as of March due to improved collections and repossession of vehicles from the NPA bucket. Even STFC management indicated that the collection through cash jumped to 45% of total collection compared to 30% observed. The company expected the rural part of the portfolio, especially the used vehicle segment to do well on the back of bumper crop in the rabi season which generally comes to market by May-June.

While the turnaround in sentiment also helped BHAFIN’s operational performance as well with 31% sequential growth in disbursal , there still appeared some soft spots in the March quarter including increased provisions that resulted in quarterly loss. The overall collective efficiency in the March quarter and first 25 days of April has remained stable at around 96.6%, which is an improvement from 91% reported in November.

However, the same yardstick for January and February remains at a relatively low of 94.6% and 93.6%, respectively. Portfolio at risk (PAR) for duration 8 weeks to 25 weeks improved marginally from 4.5% as of February to 3.9% as of March. Given that Maharashtra and Madhya Pradesh collectively account for 15% of the gross loan portfolio, whether credit discipline in these states get impacted in the coming weeks will determine if BFIL can meet its guidance for AUM (48% growth) and net profit (50% growth) for FY18.