NBFC-MFIs to take a hit as RBI reins in SHGs
The RBI has directed banks to collect and share a database of self-help group (SHG) members with credit information bureaus from Jul’16. While this move will strengthen the microfinance database in the long run, NBFC–MFI credit growth and asset quality could be hit in the medium term as data sharing will rein in the prevalence of overleveraging and multiple-source borrowing, weeding out persons who are currently borrowing from SHGs to repay NBFC-MFIs.
* Banks to start sharing SHG data with credit bureaus:
The RBI has directed banks to collect credit information of SHG members at the time of (1) sanctioning a loan to new SHGs, or (2) renewal of existing loans, or (3) granting of additional loans to existing groups. The information requirements will be implemented in two phases starting from Jul’16 and are to be completed by Jul’18. Banks have also been asked to immediately start monitoring SHG-NPA levels on an ongoing basis.
* MFI credit growth to take a hit over medium term:
As on FY14, SHG credit from banks stood at Rs 429bn and formed 1.5x of MFI credit. SHGs have a large presence in thriving MFI markets such as Karnataka, Kerala, Tamil Nadu, West Bengal and Odisha, and account for ~60% of total microfinance credit.
The new guidelines will dampen growth over the medium term as the aggregation of MFI and SHG data will lead to (1) a potential shakeout of duplicate customers as many may reach the cap of Rs 100k on microcredit that can be availed per person, and (2) a breaching of the cap on the number of institutions permitted to lend to an individual (maximum of two), which may now be applicable on the aggregate data. The above limits currently apply only to joint lending group (JLG) loans, but upon data aggregation the limit is likely to be made applicable to bank as well as MFI borrowings.
* NBFC-MFI asset quality could be affected:
We see repayment difficulties for customers who are currently borrowing from weak PSU banks and paying back NBFC-MFIs. Currently, the absence of a shared database masks the NPAs of NBFC-MFIs. Once the database becomes fully operational, it will put a check on such borrowers and can possibly strain the asset quality of a few NBFC-MFIs.
* Long-term positive for MFI sector:
With this move, the RBI aims to put a check on overleveraging and borrowings by individual customers from multiple sources, which will improve the sector’s outlook in the longer run. Though MFI growth and asset quality are likely to suffer in the near term, we believe the central bank’s move will be long-term beneficial for all stakeholders. SKSM will be as affected by these norms as its other NBFC-MFI peers and we maintain our SELL call on the stock, with a target price of Rs 320.
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