Bharat Financial Inclusion reveals stressed loan book
Loan stress and gradual recovery to weigh in near term
On Monday, Bharat Financial Inclusion Ltd (BFIL) revealed rising stress on its loan book. And this is unlikely to be taken lightly by markets.
Cash crunch from demonetisation and worsening repayment in Uttar Pradesh and Maharashtra have started pulling down loan quality. With the states in election mode, the buzz around possible loan waivers has gathered momentum and led to disruption in repayment cycle. Thus, the microfinance body now has ~306 crore or 4.5 per cent of loan book where there have been no payments for more than eight weeks. Though collections have started improving, BFIL believes it will take another couple of months for things to normalise. It believes recovery in lending business will be a gradual one, rather than Vshaped one. The key uncertainty, though, is regarding the provisions for bad loans. The company will decide by the end of this month on how it will provide for this elevated stress and unless the collections improve meaningfully or it gets some leeway from RBI on recognition/provision for bad loans, its bad loans should start showing up somewhere in April-May. Overall collection efficiency for the company stood at 93.4 per cent between November 11, 2016, and February 28, 2017, down from 99.8 per cent levels before demonetisation.
These should come as a surprise for markets, which were hoping for a return to
BFIL management expects growth to rebound in FY18 and pegs loans to grow by about 50 per cent
normalcy. The BFIL stock thus is likely to remain under pressure in Tuesday's trading session. Post these disclosures, the company could also witness a host of earnings downgrades by analysts for both FY17 and FY18. Both these factors would keep the stock price under check in the near-term, believe analysts.
For those looking at the medium term, there are still some positives. One, management expects growth to rebound in FY18 and pegs loans to grow by about 50 per cent. Even if the growth number comes a bit lower, it should be better than most peers. Since larger players such as banks are shying away from directly lending to such small customers, the scope for penetration continues to be high. Second, the political risk could reduce from here on with key state elections coming to an end.
Lastly, as murmurs of a possible merger with IndusInd Bank grow strong, most analysts believe such a deal would be a win-win situation for both the companies. A merger would give IndusInd Bank access to the fast-growing segment of microfinance, while it will lead to technology improvements, higher scalability and profitability for BFIL. These could possibly lend some support.