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Asset quality challenges to ease on MFI relief measures

CE remains near-term monitorable; turning more sanguine on asset quality over 2HFY22

* The finance minister, in a press conference on 28th Jun’21, announced relief measures for the MFI sector. The government announced an INR75b credit guarantee scheme for incremental disbursements, with maximum borrower indebtedness of up to INR125k. The scheme would provide relief to ~2.5m MFI borrowers, corresponding to ~4% of the active borrower base.

* This has come on the back of a relief package announced by the Assam state government last week providing aid to key MFI lenders. We believe the risk to MFI lenders is receding at the margin level, even as near-term earnings / asset quality pressure may continue – as the implementation of these schemes would take some time.

* For players such as Bandhan, whose SMA book stands at 8.6% currently (from 16.6% in 3QFY21), the double benefit of (a) the MFI package by the Assam state government and (b) relief measures for the MFI sector by the central government would enable a faster turnaround in asset quality / the earnings trajectory. We are turning more sanguine on asset quality over 2HFY22, although we remain watchful on collection efficiency in the near term – primarily in the key state of West Bengal (WB; ~45% of the MFI portfolio).

* Thus, we increase our TP to INR375 (from INR335) on 2.5x FY23E BV. However, we maintain our NEUTRAL rating as we await more clarity around the implementation of these schemes.

Government announces significant relief measures for MFI sector

* The finance minister, in a press conference on 28th Jun’21, announced positive relief measures for the sector. The central govt. announced a credit guarantee scheme amounting to INR75b, which is estimated to benefit ~2.5m impacted MFI borrowers (~4% of active MFI borrowers). All standard borrowers, including those that are delinquent for <89dpd, would be eligible. This scheme would provide a guarantee of up to 75% for loans up to INR125k.

* This would help address the asset quality issues at the industry level and boost confidence among lenders to make fresh disbursements in the MFI sector. This is the first time that the central government has announced a relief package focused on the MFI sector, thus underscoring the importance of the segment.

Assam relief package helps address sector woes – a recently positive

* The relief measures by the central government have come on the back of a relief package announced by the Assam state government last week providing aid to key MFI lenders. The state government announced the scheme to regularize stressed borrowers and repay the entire loan amounts of highly stressed borrowers. The total relief package outlay of INR80–85b was huge, covering ~69% of the total MFI loans in Assam.

Bandhan to be key beneficiary of double bonanza; other MFI lenders would also benefit

Bandhan, whose SMA book stands at 8.6% currently (from 16.6% in 3QFY21), would be the key beneficiary of the double benefit of the MFI package by the Assam state government and the central government’s relief measures as it owns nearly half the total MFI loans in the state. Bandhan’s total exposure in Assam is INR74.3b (3QFY21), which forms ~14% of the total AUM. Nearly ~18% of Bandhan Bank’s Assam portfolio is in the SMA category (~7% in 8–30 days overdue; 6% in 31–60 days overdue; 5% in 61–90 days overdue), of which ~14% has already been recognized as NPA as of Mar’21. Therefore, the Assam relief package has brought major respite for the lender. Moreover, central government relief measures would enable a faster turnaround in asset quality / the earnings trajectory.

Higher overdue accounts in WB remain key monitorable

Bandhan had a higher overdue position with ~10% of the WB portfolio in the SMA category and another ~10% already recognized as NPA. The state was facing collection headwinds even before the resurgence of COVID due to election disruptions and the hope of loan waiver announcements. Furthermore, the impact of the second COVID wave was higher in rural India, which adversely affected collection efficiency in Apr’21 (94–95%) – collection efficiency had almost recovered to 98% in Mar’21. The government measures announced on 28th Jun’21 could provide some support; however, asset quality in WB would be a key monitorable as 45% of Bandhan’s MFI portfolio is concentrated in this state.

Valuation and view

We believe the risk to MFI lenders is receding at the margin level, even as near-term earnings / asset quality pressure may continue – as the implementation of these schemes would take some time. The double benefit of (a) the MFI package by the Assam state government and (b) relief measures for the MFI sector by the central government would enable a faster turnaround in asset quality / the earnings trajectory. We are turning more sanguine on asset quality over 2HFY22, although we remain watchful on collection efficiency in the near term – primarily in the key state of WB (~45% of the MFI portfolio). Thus, we increase our TP to INR375 (from INR335) on 2.5x FY23E BV. However, we maintain our NEUTRAL rating as we await more clarity around the implementation of these schemes.

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