Microfinance Defaulters Rose Faster In October, Says UBS
Portfolio at risk of a borrower rose 130 basis points between September and October to 17.5%.
Loan defaults by microfinance borrowers rose at an accelerated pace in October, according to a report by UBS Securities.
Portfolio at risk of a borrower rose 130 basis points between September and October to 17.5%. This comes after a surge of 380 bps in the March-September period.
Portfolio at risk or PAR is defined as outstanding loan portfolio which is at default and can be measured in percentage terms.
The 1-30 days past due loans for the microfinance industry rose 30 bps month-on-month in October to 2.4%, up 170 bps from March. While, that of 31-90 days past due loans increased 40 bps to 2.9%. This was also up 170 bps from March.
The share of loans overdue for more than 90 days was up 60 bps month-on-month to 12.2% last month, against 110 bps rise in March to September.
Bihar, Tamil Nadu, Orissa, Uttar Pradesh and Jharkhand saw the highest month-on-month rise in 1-90 days past due and together these states accounted for 48% of MFI market share.
UBS Securities expects more loans to consistently move from default to non-performing status, keeping slippage levels high in the second half of the current financial year.
Floods might have affected collection efficiency levels in few districts and partially explain the steep rise in 1-90 days past due, according to UBS.
But the pace of rise in delinquency suggests that overleverage has not resolved itself yet and that the commentary by some managements around stress peaking in October-December might prove too optimistic, the brokerage said.
This has come as the Microfinance Institutions Network, the self-regulatory organisation for the sector, tightened rules around microlending. It made key changes, including reducing the number of lenders to a borrower to three from four earlier, and capping the maximum indebtedness of a borrower at Rs 2 lakh, including both micro and unsecured retail loans.
UBS Securities sees this move as a net positive in the medium term but said this could cut liquidity to weaker borrowers and result in quicker rise in delinquencies in the second half.
The stabilisation of portfolio at risk of 1-90 days will be keenly watched out for in the following months, the brokerage firm said.
It has a 'neutral' rating on Bandhan Bank, which has an MFI loan book of 46%, followed by IndusInd Bank Ltd. at 9% and AU Small Finance Bank at 7%.
The microfinance sector has been witnessing stress and overheating for the better part of this financial year. Customer overleveraging, inability to repay and lending to customers with multiple fake ID cards are one of the reasons why the microfinance sector has been undergoing stress.
