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State elections unlikely to derail collection efficiency trend

Collection efficiency across MFIs under our coverage remained robust during FY23, sustained in Q1FY24 and we believe it would remain robust going ahead despite 4 major state elections – Chhattisgarh & Madhya Pradesh (MP) in Nov’23, and Rajasthan & Telangana – in Dec’23. Cumulative industry AUM exposure in these four states was at 12% of Mar’23 AUM with MP accounting for the highest share at 6%. The general perception is that a loan waiver is forthcoming closer to the state elections, which would impact customer repayment behaviour. However, historical trend suggests lack of a direct correlation between state elections and collection efficiency as reflected in the PAR 30 portfolio declining or remaining unchanged two months prior, and two months’ post, the state elections.

Four state elections in next four months with cumulative exposure of 12% of industry AUM as of Mar’23

While the MFI industry has showed strong resilience in collection trend even during periods of state election, there is a general anticipation of loan waiver closer to state elections, which may impact customer repayment behaviour. In the next four months, four states – namely Chhattisgarh, MP, Rajasthan and Telangana – will face elections. Cumulative exposure to these four states stands at ~12% of total Industry AUM as of Mar’23 with MP’s share at 6% and Rajasthan’s at 5% while Chhattisgarh and Telangana shares stood at negligible 1% and 0.5% respectively. PAR 30+ portfolio as of Mar’23 for MP was at 2.8%, Rajasthan at 3.0% and Chhattisgarh at 2.7%.

Historical trend suggests lack of correlation between collection efficiency trend and state elections

Collection efficiency remained robust during FY23 and sustained in Q1FY24. While anticipation of loan wavier closer to state elections poses risk to customer repayment behaviour, historical trend suggests otherwise. PAR 30+ portfolio movement for states like Chhattisgarh, MP, Rajasthan and Telangana during previous elections (Nov-Dec’18) suggests lack of direct correlation between customer repayment behaviour and state elections. PAR 30+ portfolio for Chhattisgarh (election date Nov’18) remained flat at 0.7% QoQ in Q4FY19 vs 0.7% in Q3FY19 and 1.4% in Q2FY19, while for Rajasthan (Dec’18) it fell to 0.6% in Q4FY19 vs 1% in Q3FY19 and 1.7% in Q2FY19. MP showed a mixed trend as PAR 30+ increased to 4.7% in Q3FY19 from 3.6% in Q2FY19, but fell sharply to 3.3% in Q419.FY

Our view

Cleaner balance sheet, negligible stressed asset pool as of Jun’23 and revised MFI regulations (removal of pricing cap and mandatory comprehensive bureau report) would continue to act as strong industry tailwinds going ahead. However, while we believe a loan wavier announcement closer to elections poses risk of lower collections due to temporary delay in payments, ultimate loss is less likely.

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