Microfinance Industry most vulnerable to lockdown and moratorium

As first order impact, collection cycle may be hit, while lack of moratorium-relief from banks may squeeze out liquidity

Stocks in the microfinance (MFI) space whether CreditAccess Grameen, Spandana Spoorthy or Bandhan Bank (with significant MFI exposure) have shed 37 – 59 per cent in the past month. This is despite managements of Bandhan Bank and CreditAccess Grameen repeatedly trying to assuage investors’ concerns on their business outlook and explaining to them why the country-wide lockdown may only be a temporary hit on their financials.

In a recent call with analysts, Bandhan Bank said it has stopped fresh disbursement/collection but has not seen MFI customers dipping into their savings yet. “As a long-term strategy, the bank has already diversified asset portfolio, with the MFI share down to 61 per cent and to fall further to 40 per cent over the years,” analysts at Emkay Global Financial note. “While all weekly centre meetings, disbursements and collections are temporarily stopped due to lockdown, employees are maintaining regular connection with customers via phone calls,” analysts at ICICI Securities note after a call with CreditAccess Grameen’s management.

Despite these assuring outlook, large brokerages, whether Kotak Institutional Equities, Axis Capital, Ambit Capital or Credit Suisse, the unanimous word is the MFI sector may be in for tough times.

“MFIs are mostly daily wage earners involved in small scale business activities and are relatively vulnerable to external shocks, as witnessed during demonetisation. A prolonged period of lockdown or drop in overall business volumes can impact credit off-take,” analysts at Kotak Institutional Equities note.

Above noted entities with MFI exposure, Bandhan Bank thus far has seen the harshest downgrade with Ambit Capital reducing its target price by 84 per cent to Rs 65 apiece (from Rs 395 earlier), though maintaining its ‘sell’ rating. “The change in target price has been driven by our expectation of losses in FY21 and single-digit return on equity over the next 4 – 5 years,” the brokerage adds.

Apart from business disruption, the MFIs operating as non-banking financial companies – CreditAccess Grameen and Spandana Spoorthy, within the listed space, may have more worries. It is gathered that MFIs have represented to the regulator that their banks aren’t extending the benefit of moratorium to loans due by them, while they have passed on the gains of moratorium to their customers. In a such as situation, with cashflows not accruing, the sector faces a huge risk of liquidity squeeze. Banks with MFIs exposure such as Bandhan (or even RBL Bank or IndusInd Bank, where share of MFI loans isn’t very high as Bandhan) may be better placed as they have the option of raising deposits and tapping the capital market. However, whether their MFI businesses continue to enjoy the rating as they currently do may be questionable if the MFI business faces near- to medium-term challenges.

Therefore, from an investors’ standpoint, despite the steep correction in MFI stocks including the banking names, investors shouldn’t remain optimistic on the sectors’ outlook. Reducing their exposure to these stocks, wherever possible, may be prudent.