Sector Update | 3 July 2017

Financials

– MFI

Refer

to

our Ground Reality

report dated 23 May 2017

Getting back on track

Collection efficiency improving in most states



We interacted with several MFIs, both private and public, to get an update of the

situation on the ground. There is a visible improvement in most stressed states,

barring Maharashtra.



Our interactions with managements suggests that collection efficiency in UP has

largely returned to 98%+ levels from the 30-40% levels a few months ago. 90dpd

overdues, too, have reduced to sub-15% levels. The situation in Maharashtra still

remains grim with 90dpd overdues at 17-20%.



The pace of disbursements has picked up in most geographies and is expected to reach

pre-demonetization levels in 3-6 months on improving collection efficiency.

Collections stabilizing in key states; situation in Maharashtra remains grim

Collection efficiency in Uttar Pradesh (UP) is back to 98-99% levels, up from less

than 50% post demonetization. Other major states like Karnataka and MP are also

displaying much improved collection trends. PAR >90dpd in most troubled states,

including UP, has dropped below 15%. However, Maharashtra continues to witness

significant delinquency pressures, with PAR >90dpd at 17-20%. Several companies

confirmed that the next six months could remain a difficult period, particularly in

Maharashtra. While our interactions with the companies suggest minimal/zero

impact of the recently announced farm loan waivers, we would like to observe the

delinquency trends for a few more quarters.

Disbursements improving on the back of client intent and repayments

Pace of disbursements could be back to pre-demonetization levels in the next 3-6

months.

We believe repayments and improved collection trends have increased the

confidence of companies to start disbursing loans at a healthy pace again. While

group discipline is still considered low, some companies mentioned that attendance

in center meetings is improving, which is a positive sign. While several emphasized

that all customers had started paying again in these group meetings, we take this

with a pinch of salt, considering that our ground reality channel checks suggested

that collection officers had to visit clients individually to recoup money.

Continuous stakeholder engagement crucial post demonetization

MFIN has been rigorous in initiating engagements with the government, local bodies

and the RBI. It has engaged in awareness campaigns, press notices and extensive

media advocacy to manage negative media reporting (as also detailed in our recent

publication on microfinance). This has helped control the domino effect of trouble in

one state spreading to others, and MFIN believes this to be the sole cause for

collection efficiency getting back to 97-98% levels. Several companies also

emphasized that they had spent significant sums on awareness campaigns to

educate customers about the importance of credit history. Customers are realizing

the importance of maintaining a good credit record to get access to future credit.

Alpesh Mehta

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

Subham Banka

(Subham.Banka@MotilalOswal.com); +91 22 6129 1567 /

Piran Engineer

(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539

8 August 2016

1

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

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

Financials

Industry undivided on right model – JLG or individual secured?

Not everyone is going the “Equitas Way” in terms of the business model – many of

the private companies still have faith in the JLG structure. It seems as if they lack the

expertise to go into individual secured lending, or the cost metrics and yields are

just not in their favor. However, some companies have iterated that the industry is

shifting away from the JLG model. One of the SFBs communicated that they will do

both JLG and individual secured lending – the mix will be based on risk-reward. The

company is very bullish on microfinance and will not diversify into other businesses.

Digitalization evident; yet, not short of challenges

MFIN has a broad agreement with all lenders to move towards E-KYC – aadhar

seeding is ~90%. Interactions with fin-techs that have collaborated with MFIs reveal

that besides disbursing cash electronically, these tie-ups will be used to reduce lead

time in collections and allow more efficient risk management. Opex costs are

expected to decline significantly from current levels through such partnerships.

Cashless disbursements/collections have been challenging, given the lack of ATM

infrastructure (and hence, no withdrawal facility) in rural locations. However, a

number of fin-techs are coming up with innovative solutions for payments in

microfinance. Micro ATMs will also play a big role in the coming months.

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

Portfolio at risk for top 10 states in terms of GLP

Karnataka

Tamil Nadu

Uttar Pradesh

Maharashtra

Madhya Pradesh

Bihar

Odisha

West Bengal

Gujarat

Kerala

GLP Q4FY17

(INR b)

70

60

49

49

35

35

33

30

17

15

State market

share in GLP

16%

13%

11%

11%

8%

8%

7%

7%

4%

3%

PAR 30

18%

14%

37%

28%

17%

3%

1%

14%

16%

1%

PAR 90

12%

2%

14%

20%

9%

1%

0%

4%

9%

1%

PAR 180

0.2%

0.2%

0.6%

0.2%

0.4%

0.1%

0.1%

0.2%

0.4%

0.1%

Source: MOSL, MFIN

Exhibit 2: PAR spiked dramatically in the aftermath of demonetization and elections (%)

Portfolio at risk > 30 days

Portfolio at risk >90 days

8.3

4.1

3.9

3.9

0.7

FY12

FY13

0.6

0.4

FY 14

0.3

0.4

FY 15

0.3

0.3

FY 16

0.2

FY17

Source: MOSL, MFIN

3 July 2017

2

Financials

Exhibit 3: Delinquency buckets – March 2017 (%)

20.9

Exhibit 4: Trend in disbursements for the industry

No. of accounts (m)

444

246

Value (in INR b)

503

5.3

5.8

1.8

8.0

17.2

91+

1 to 179

FY15

24.9

FY16

28.3

FY17

Source: MOSL, MFIN

01 to 30

31 to 60

61 to 90

Source: MOSL, MFIN

Exhibit 5: Trend in borrower indebtedness

Average Loan outstanding per client (INR)

15,063

11,100

15,277

Exhibit 6: Ticket size largely stable

Average loan amount disbursed per account (INR)

17,812

14,321

17,779

FY 15

FY 16

FY17

Source: MOSL, MFIN

FY 15

FY 16

FY17

Source: MOSL, MFIN

3 July 2017

3

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