Will be largely led by the surfacing of sub-lending, overleveraging, and a recent state government ordinance, says InCred Equities
MUMBAI, Mar 25 (The CONNECT)- Karnataka microfinance sector may witness a rise in bad loans this year due to over leveraging by lenders, a study shows.
“We expect high-single to early-teen rise in bad loans to crop up in 4QFY25F,” says InCred Equities titled ‘Ears to the ground: Not for the faint hearted.’
This will be largely led by the surfacing of sub-lending, overleveraging, and a recent state government ordinance. Collection efficiency in the X bucket – no overdue – has dropped from the Dec 2024 level and can be lower than expectations, the research report says.
The State government has recently brought out an ordinance to regulate the micro finance sector with provisions for 10 year jail and penalties up to Rs 5 lakh for violators.
As microfinance institutions or MFIs are backtracking their steps to the present, Incted peeped into the State, leading to “convoluted underserved borrowers”.
The team observed that there is a heightened sense of caution among lenders. Customers indicated that their pecking order is based on higher ticket sizes and monthly collections.
Karnataka was among the top performing states in terms of asset quality in 3QFY25, with a slow accretion in early delinquencies witnessed in the 30-90 days past due (DPD) bucket. The on-the-ground check, however, indicates that there is a tactical shift in 4QFY25, resulting in a spike in early-bucket delinquencies.
This will be largely led by the surfacing of sub-lending, overleveraging, and a recent state government ordinance. Collection efficiency in the X bucket – no overdue – has dropped from the Dec 2024 level and can be lower than expectations.
New customer addition has almost come to a standstill in Karnataka. Furthermore, the renewal rate in respect of existing customers has also reduced on account of stricter guard rails of 3+ lenders and the ticket size limit of Rs200,000.
Disbursements by seasoned players are also restricted to ~30-40% of the portfolio. Despite restricted disbursements, there is no major surge in the overlap between MFI borrowers and gold loan borrowers, estimated at ~30%, which has been constant in the last two-to-three quarters.
Among NBFC-MFI lenders, the largest lender, CreditAcess Grameen (CREDAG), with ~21% market share (Fig. 2), stood out with its weekly collections and gradually rising ticket size.
The company enjoys vintage customers who are adhering to the repayment cycle, despite the overleveraging. These customers have survived through the Andhra Pradesh MFI crisis, demonetization and the Covid-19 pandemic, thus instilling a sense of financial discipline.
Small finance banks or SFBs work with relatively higher ticket sizes and monthly collection models, which is the customer-preferred model. Among SFBs, Ujjivan SFB stood with its seasoned underwriting mechanism in place. We believe the dust will take another two quarters to settle before disbursements can take off with renewed vigour.
“Among our coverage stocks, we continue to have a HOLD rating on Spandana Sphoorty Financial with a stable target price of Rs360, valuing it at 0.8x FY26F BV,”InCred says.
