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00:00Let me bring on board actually the sector of the hour to discuss that, Shweta Daptardar,
00:07Vice President of or tracking BFSI at Ilara Securities. Shweta, good having you here.
00:16I want to first start off by asking you, what does this crackdown actually mean
00:23for the MFI sector? Does it mean that the pain is yet to come? What is your assessment of what
00:29RBI is saying? Yeah, good morning. So the pain is already there. It's been around for a while now.
00:38And like we have been mentioning, you know, last seven to eight years, the sector which has grown
00:43phenomenally higher has been MFI and MSME sector. Now, yesterday's strong action that comes from
00:51RBI as against few NBFCs with regards to non-compliance of certain norms, especially
00:58in the microfinance business and also gold lending, is going to hit definitely harder.
01:04So the entities in question, especially from the listed side is Aashirwad Microfinance,
01:09which is subsidiary of Banapuram Finance, is definitely going to be hit harder. We are
01:15seeing downgrades on the EPS front. So that is definitely going to have a negative rub-off
01:22across NBFCs. Okay. No, so point taken. I want to try and focus in because you've brought it up,
01:32Aashirwad. It's around 25% of Manapuram's book. What are your estimates now hinting at?
01:41What's the kind of impact like maybe over the next year at least? Because
01:46likely will take six to 12 months to resolve. Yes. So any entity coming under RBI radar,
01:53as you rightly pointed out, should definitely be under pressure at least for six months and
01:59maybe business normalization happens say over 12 months timeframe. The entity in question
02:05definitely wherein 25% of AUMs of Manapuram is definitely held by microfinance subsidiary.
02:12What is more important is the profitability matrix. So Aashirwad forms over 21%
02:19of the profits of the parent company and 9% of the parent's network. So given the kind of
02:25pressures and now bar on business activities incrementally for Aashirwad would definitely mean
02:32over at least 20% earnings cut for the parent company. So outlook definitely remains gloomy.
02:39We also see this spreading across the gold lending business activities of the entity in question.
02:46And it pushes listing too, right? So value unlocking also getting pushed,
02:50they filed their DRHP. That is further accentuating the pain.
02:56Very much. So if you see the turn of events, it was in 2023 October exactly a year ago
03:03wherein Aashirwad had filed for IPO. And then the chain of events have been little volatile.
03:10So in January, there was an advance that was put on the company for IPO listing. Then April was
03:17the good news wherein SEBI cleared the listing sort of process. And now October, that is yesterday,
03:25we saw this coming with respect to non-adherence to guidelines. So it's been a roller coaster.
03:32But what largely it hints at is definitely the subsidiary would be now looking for
03:40money or funding from the parent. So that definitely is an offing to get back
03:45operationally fully. And given that the leverage is on the higher side,
03:51capital raising or infusion from the parent entity is definitely an offing.
03:57Yeah. So I agree with you, but 20% was their capital adequacy, if I recall right.
04:03Please give us perspective on that. And you will also see loan repayments getting front-ended,
04:09right? Or rather, maybe not front-ended, but there won't be any loan disbursements. And
04:15therefore, loan repayments will actually short up capital at Aashirwad. So just give us perspective
04:20on why the capital raise. Yeah. So two things here, more than loan repayments,
04:27we have to also see from the perspective of the headwinds in the sector. So if you look at the
04:31collection efficiencies, if you look at recoveries, they have been abysmally lower quarter-on-quarter
04:37basis. We know already the business update numbers from the top player in the market
04:42was already reported over 200 bps decline in collection efficiency. So somewhere the collections
04:48and repayments have got delayed and impacted. So regardless of whether repayments come timely
04:54or not, capital raising or funding requirement is definitely an offing. The reason being
04:59now that, as you also rightly pointed out, now that the business activity comes to standstill,
05:06going forward, the current operational matrix will require a support. And that's where we see
05:13some funding coming from the parent company. And we've seen this at least over the last
05:21couple of quarters. You had someone like a Fusion Microfinance also pre-warn investors that
05:28this time's results, they're going to have a knock of around 500 crore in terms of provisioning.
05:34And that's a large quantum for the size that Fusion is. We're seeing that in credit access
05:41as well. Growth has slowed down. Spandana as well. Just talk to us about how long do you believe
05:48this cycle is going to last? Because growth is clearly slowing down visibly. Processes are
05:55getting revisited. And it's a very small pocket of the market. And therefore, everything else
06:01currently remains a blue sky. Yeah. So one is the sector is
06:07definitely under stringent radar of the regulator. So there's regulatory forbearance,
06:12which will definitely lead to recalibration of loan growth for the entire MFI space per se.
06:19Second, the main concern or the prime concern, which stems from the fact that there has been
06:26over-leveraging at the borrower base. So the number of loans per borrower has been rising
06:32higher since a couple of years. So these are the biggest concerns which RBI is trying to address.
06:38And that's where you will see calibration on the loan side. Second, and which RBI highlighted even
06:44in yesterday's press release, was the usurious rates or mispricing of assets. So there has been
06:50higher interest rates that have been charged. Spreads have been higher over and above the
06:55cost of funds. So that is another reason which has been impacting the earnings of these MFIs,
07:01wherein now margins will come under pressure. And third and the most important point, which you
07:06pointed out, is the increased provisioning requirements. So while the headwinds have
07:12been scattered across geography, so there are geography-led challenges, then there are structural
07:17challenges, like I mentioned, in terms of over-leveraging of borrower base. So that put
07:23together, your credit cost is definitely looking higher. So negatively, your earnings remain under
07:29deep pressure over the entire space. So in my sense, in our assessment at Alara, at least for
07:35two quarters, we say MFI is a complete go-buy. So that's Q2, Q3 or Q3, Q4?
07:44Q3, Q4. Okay, got it. And these are times when you can clearly and visibly
07:51separate the men from the boys, in terms of processes, in terms of asset quality,
07:55just kind of reflective. Which ones do you believe will stand out and therefore,
08:00command a premium valuation, maybe one to two quarters out?
08:05Yeah. See, we are coming from the fact that the valuations have been lofty for NBFCs for a while
08:11now, with rate card expectations also still away, and maybe perhaps 25 to 50 bips of rate card by
08:18the end of this year, definitely do not suffice for margin improvement, especially where
08:25your bank borrowings have become zero due to RBI increased risk weightage norms. So we are coming
08:31from a scenario where valuations have been lofty. Now, regulatory forbearance comes into picture.
08:37Outlook is gloomy as far as the whole space is concerned. So net-net going forward, we do not
08:44see much of outliers, at least in the MFI space. As far as the whole space of non-banking financial
08:54services is concerned, cherry picking is the key. So we would go by strong balance sheets,
09:00higher liquidity ratios, and the ones with stable asset quality. And if I were to list,
09:05there are very few names who fits the bill. So for now, the sector looks gloomy per se.
09:11Gloomy for now. Okay, thank you so much, Swetha. It's good having that context. And of course,
09:15Mannapuram reeling under pressure. So thanks for that viewpoint.