Recovery for Bharat Financial and Ujjivan some time away

Maharashtra accounting for 11% of loan book remains a pain point

Stocks of microfinance institutions (MFIs) and small finance banks (SFBs) are yet to pick up after a weak March quarter (Q4) performance. Ujjivan Financial Services and Bharat Financial Inclusion have seen 6–11 per cent erosion in their stock prices since their Q4 results. It is anticipated the recent developments, particularly on farm loan waiver, may put further pressure on these stocks. As it comes at a time when the overall collection efficiencies are improving, investors need to wait for more clarity on how these developments have affected the collection discipline. This is also an important monitorable as the collection efficiency in five key states — Maharashtra, Karnataka, Madhya Pradesh, Gujarat and Uttar Pradesh — are yet to show a strong recovery. A recent report by India Ratings & Research (Ind-Ra) highlights these states account for 90 per cent of the total default in stressed transactions, where the payment period has been less than nine months and are rated by Ind-Ra.

In this context, a farm loan waiver may result in further deterioration of collection patterns. The UP government announced waiver of farm loans soon after taking charge in March, while the Maharashtra government gave in to farmers’ demands a few days ago. While UP’s loan waiver may not hurt Ujjivan and Bharat Financial much as the state accounts for only 7–8 per cent of its total loan exposure, the same cannot be said of Maharashtra, which accounts for over 11 per cent of the total loan book for both the financiers. 

“A farm loan waiver, therefore, is negative in terms of sentiment,” Ambareesh Baliga, an independent market expert said. Nonetheless, analysts believe it may be tough to quantify the pain ahead in absence of empirical evidence on how farm loan waivers have impacted the MFI sector. 

Despite that, Abhinesh Vijayraj of Spark Capital warned even if the collection efficiency deteriorated from 99.8 per cent to 99 per cent, it would still hint at deterioration in asset quality. “The current phase of asset quality issue is an aftermath of demonetisation coupled with the politically mooted farm loan waiver,” he said. “So asset quality may remain weak for the next two–three quarters.” In sync with the pain ahead, analysts have sharply reduced their earnings expectations from Bharat Financial and Ujjivan. Interestingly, while net interest income may not witness a huge dent, both the financiers could see a significant jacking up of provisions towards bad loans in FY18 (see table). 

Not surprisingly, investor sentiment also remains weak for both stocks, despite the recent correction in prices. An analyst at a foreign brokerage reviewing his stance on Bharat Financial and Ujjivan felt investors should book profit. “Ujjivan and Bharat Financial are on a correction mode and investors may be better off taking fresh exposure when there is clarity on the asset quality issue,” he cautioned.