Sector Update | 3 May 2017

Financials

Microfinance: Collections picking up in troubled states

Vast opportunity, yet clouded by collection uncertainty in key states

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We recently attended the

MFIN Conclave - Microfinance in Asia: A Mosaic.

Based on

discussions with the delegates and industry experts, the consensus is around

improvement in the asset quality situation from February levels. However, in certain

pockets, the situation remains grim.

The top-5 states, which accounted for ~50% of the AUM at the end of February, had

70%+ of the problems.

Borrowers are gradually coming to terms now with the importance of maintaining a

good credit record – they are realizing that repayments are the only way to ensure

future loans from organized financiers.

Amongst the larger states, Uttar Pradesh (10% of industry AUM and 20%+ problem at

PAR >0DPD) is improving at a healthy pace. However, certain pockets in Maharashtra

(Vidharbha region) remain areas of concern.

Asset quality issues moderating: At PAR, delinquencies stand at ~20.9%

Post the initial issues related to demonetization, RBI dispensation-related confusion,

and state and local elections, the situation has been slowly normalizing since March

2017. From the borrowers’ demand for complete loan waiver to waiver of charges

to reduction in interest rates, lenders have ultimately agreed to extend the loan

tenures (lack of options). At PAR (>0d), delinquency levels are ~21% and are unlikely

to fall steeply, given the inability of customers to make balloon payments of

overdue installments. Hence, delinquencies will remain high for a significant time

period. The loan repayment schedules are being extended, and the PAR (portfolio at

risk) is likely to reduce sharply only when the loan nears the end of the repayment

period and the borrower is removed from the books.

Lessons to be learnt from AP crisis and recent issues

Growth has been aggressive to the extent that it has compromised the basics of

some prudent lending practices. The approach should have been to grow steadily

with focus on understanding consumer behavior and learning from defaults in this

unique customer segment. Increasing trend in the ticket sizes raises red flags for the

industry. The difference between the Andhra Pradesh (AP) crisis and the current

scenario is that this time there are numerous troubled geographies.

Separating wheat from the chaff: Sustainable businesses to emerge winners

Given the uncertainties in predicting asset quality, adequate provisions/buffers must

be made in the good times to protect against the current calamitous situation. The

current phase may weed out several players – companies that focus on long-term

sustainable RoE v/s just maximizing RoE will be the survivors. There has been an

increasing talk of JLG model not being the best approach to cater to this customer

profile. Instead, individual secured lending such as consumer finance, housing,

business loans, vehicle finance, and savings/remittance products would entrench

relationships. MFIs should have a huge role to play in low cost housing. Of the

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526

Subham Banka

(Subham.Banka@MotilalOswal.com); +91 022 6129 1567

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors

2016

advised to refer through important disclosures made at the last page of the Research Report.

are

8 August

1

Financials

INR700b MFI industry, only INR220m has gone into housing. Current regulations

allow MFI companies to go up to 15% for non-microfinance financing.

Digitalization: Huge opportunity and strong infrastructure in place…

Key enablers for digitalization in the MFI space are in place with 1b+ mobile

phones/aadhar cards/bank accounts. There is a strong push from the government to

make 60m households digitally literate over the next three years, with a target of

25b digital transactions by the end of FY18 (ambitious, given that the current

number is 2.7b transactions). The National Optic Fiber Program, which aims to

connect 250,000 gram panchayats with the internet, is crucial. Innovative

applications like BHIM and the UPI will be key enablers.

...however, challenges persists

The MFI industry in India covers 160m-170m households, that is, ~830m borrowers.

Of these, only 6% of the borrowers have access to computers. In the age group of

14-29 years, only 18% know how to operate computers. Only 1/3

rd

of the 900m

unique mobile phone users have smartphones – however, incrementally 50% of the

new phones sold are smartphones. A very small proportion of the villages have

access to internet and the National Optic Fiber project of the government could be a

game changer in this regard. Inadequate ATM infrastructure and low withdrawal

limits in

Jan Dhan

accounts is a huge deterrent to MFI companies disbursing in cash.

Despite having the necessary technology, the lack of acceptance is a roadblock.

Role of credit bureaus needs to be enhanced

Panelists also put forward the case for enhancing the role of credit bureaus to

provide insights rather than just raw data. There is a need for a single repository

wherein information of all sectors / individuals is available so as to encourage

simplicity and efficiency and avoid overlap. A single view/credit report is the desired

outcome. Lenders on their part must invest today in data storage and should strive

to take a holistic view on the customer before lending.

Disbursements picking up again; near-term uncertainties remain

After AUM decline until February 2017, March has seen MoM rise in AUM. However,

incremental growth is largely coming from existing customers. At the industry level,

>60 DPD delinquency levels are at 9.8%. At the aggregate level, 5-10% of the

portfolio may turn bad. Overleveraging remains a key issue for the sector (according

to published research, 9% of the outstanding loans amount is from third lenders –

above the maximum two-lender rule). In our view, near-term uncertainties on

collections would continue. Central elections remain a key medium-term risk.

3 May 2017

2

Financials

Exhibit 1: MH, KN, and UP contribute bulk of the industry PAR

Portfolio at risk for top 15 states in terms of GLP

Karnataka

Tamil Nadu

Maharashtra

Uttar Pradesh

Bihar

Madhya Pradesh

West Bengal

Odisha

Kerala

Gujarat

Haryana

Punjab

Jharkhand

Rajasthan

Assam

GLP Q3FY17

(INRb)

81

70

65

60

40

39

35

32

30

21

15

13

13

13

11

State market share in loans

14%

12%

12%

11%

7%

7%

6%

6%

5%

4%

3%

2%

2%

2%

2%

PAR 30 PAR 90 PAR 180

6%

0%

0%

1%

0%

0%

9%

0%

0%

29%

1%

0%

1%

0%

0%

7%

1%

0%

2%

0%

0%

0%

0%

0%

1%

0%

0%

5%

1%

0%

14%

1%

0%

8%

0%

0%

3%

0%

0%

8%

1%

0%

1%

0%

0%

Source: MOSL, MFIN

Exhibit 2: PAR spiked up dramatically in the aftermath of demonetization and elections

Portfolio at risk > 30 days

Portfolio at risk >90 days

8.30%

4.09% 3.93%

3.90%

0.70% 0.60%

FY12

FY13

0.40% 0.30%

FY 14

0.40% 0.30%

FY 15

0.33% 0.20%

FY 16

FY17

Source: MOSL, MFIN

Exhibit 3: Delinquency buckets – March 2017

20.90%

5.30%

5.80%

1.80%

8.00%

01 to 30

31 to 60

61 to 90

91+

1 to 179

Source: MOSL, Company

3 May 2017

3

Financials

Exhibit 4: Signs of overleveraging evident

Average Loan outstanding per client (INR)

16394.00 16,766

10,364

12,795

Exhibit 5: Rising ticket sizes a cause for concern

Average loan amount disbursed per account (INR)

20,981

17,805

14,731

13,423

12,232

11,788

7,533

8,689

FY12

FY13

FY 14

FY 15

FY 16

9MFY17

FY12

FY13

FY 14

FY 15

FY 16

9MFY17

Source: MOSL, MFIN

Source: MOSL, MFIN

Exhibit 6: Collection efficiency of BHAFIN

11th to 30th Nov dues

Dec' 16 dues

96.8%

Jan'17 dues

97.9%

93.5%

91.0%

88.8%

30th Nov'16

31st Dec'16

88.5%

31st Jan'17

Feb'17 dues

98.2%

94.9%

92.4%

89.2%

28th Feb'17

92.6%

91.3%

31st March'17

mar'17 dues

98.4%

95.7%

94.0%

1st to 25th April dues

98.5%

95.9%

94.6%

93.6%

93.2%

91.6%

25th April'17

Source: MOSL, Company

Exhibit 7: BHAFIN: Collection efficiency has been improving

95.5%

96.6%

96.7%

94.2%

92.5%

91.0%

11 to 30-Nov-

16

Dec'16

Jan'17

Feb'17

March'17

1st to 25-April-

17

Source: MOSL, MFIN

3 May 2017

4

Financials

NOTES

3 May 2017

5

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