Three Indian states have seen a sharp spike in early default rates in microfinance loans, adding to concerns of rising bad loans in the industry.
Tamil Nadu, West Bengal and Maharashtra have all seen a sequential rise in loans where repayments haven't been made for up to 30 days, according to Macquarie Research that analysed data from credit bureaus. While Tamil Nadu saw a 10.6 percentage point rise in early delinquencies, Maharashtra and West Bengal have followed with 2.8 percentage point and 1.8 percentage point increase respectively.
While an increase in defaults was expected due to the strict lockdown enforced to curb the spread of Covid-19, Macquarie pointed that it is only these three states that have seen such sharp spikes. That highlights emerging stress in these regions which house more than one-third of the microfinance industry's assets in India.
That aside, Assam continues to be a "frying pan" for microlenders, Macquarie said. Microfinance lenders in Assam had already been facing significant challenges in recovering loans due to socio-political unrest. Total delinquencies rose 22% sequential in the January-March period. Things are only about to get worse with a severe flood affecting almost 22 lakh people, the note said.
Banks bore the brunt of the rising defaults in microfinance. In the second half of FY20, their total microfinance assets saw an up to 600-basis-point rise in 0-30 day defaults. The rise is almost twice of the total industry defaults that rose between 240-320 basis points, Macquarie said. Banks with maximum exposure to the microfinance sector are Bandhan Bank Ltd., where microloans for 62% of the assets, RBL Bank Ltd. at 13% and IndusInd Bank Ltd. at 12%. Indian banks are already facing asset quality pressure with the Reserve Bank of India estimating bad loans to rise to the highest in 20 years.
Assets under management have a steady 25% yearly increase rate and are today worth over Rs 2.3 lakh crore. Still, the microfinance industry's assets continued to grow 15% over last year to Rs 2.3 lakh crore—40% of which is from banks. Uttar Pradesh, Bihar and West Bengal are the key drivers of this growth, with an average quarterly rise of 12-14%.
Macquarie said that while shares of microfinance lenders have been rallying, there is merit for investors to be cautious of the sector. “In our view, the true pain in the system will only be seen with a lag,” it said. “We advise investors to use this rally as an opportunity to sell.”
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