BFSI Sector Update - MFI Consultation Paper Takeaways - Incrementally positive for NBFC-MFIs - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

In its much-anticipated consultative paper on regulation of microfinance, the RBI has proposed greater harmonisation in the overall regulatory landscape - which includes threshold definitions anchored to household income, removal of caps on number of total lenders and pricing, and elimination of any end-use restrictions on qualifying borrowers. Given that most of the extant restrictions were applicable to NBFC-MFIs (30% of MFI loan exposure as of Dec'20), these relaxations are likely to shift the competitive positioning in favour of NBFC-MFIs. We reiterate CREDAG as our top idea that is likely to benefit from the RBI's revised proposals while we expect BANDHAN and UJJIVAN within our coverage universe to be adversely impacted.

Towards harmonising the regulatory landscape: As more and more MFIs now reside within either universal (BANDHAN, IIB) or small finance banks (8 of 10 licensed SFBs are from an MFI-origin), the RBI's extant regulatory guidelines were increasingly applicable to a shrinking share of the MFI loan market - the NBFC-MFIs (35% by volume and 30% by value as on Dec'20). In its paper, the RBI proposes to move from its classic "lender-based regulatory regime" all along to a "borrower-based regulations", thereby harmonising its prescription on household indebtedness and repayment frequency.

Threshold definitions anchored to household income: The RBI proposes to anchor its primary threshold definitions around income and indebtedness to a household (instead of an individual). Being an anchor variable, we believe this is necessarily conservatively prescribed by the RBI in its revised paper in order to avoid undue attribution or duplication of individuals belonging to a single household. Instead of prescribing ticket sizes for "first-cycle" or "subsequent-cycle" borrowers, the revised paper recommends a 50% limit on household indebtedness from the microfinance loan (inclusive of interest and principal repayment).

Removal of restrictive clauses positive for NBFC-MFIs: With the anchor thresholds now being redefined, the consultative paper proposes removal of extant caps on the number of total lenders (two NBFC-MFIs, three in total), ticket sizes, tenures, and loan pricing (10% spread cap), which were hitherto applicable only to NBFC-MFIs. To this end, the revised norms could swing the balance of competitive equilibrium in favour of NBFC-MFIs. We reiterate CREDAG as our top idea that is likely to benefit from this swing.

BANDHAN and UJJIVAN most adversely impacted: Within our coverage universe, the RBI's revised proposals are likely to most adversely impact BANDHAN and UJJIVAN, both of which lenders with a sizeable microfinance portfolio (~73% and 67% of their total loan book respectively as on Mar'21). Although it has been reducing over the past three years, BANDHAN and UJJIVAN have been riding their portfolio growth on relatively higher ticket sizes (INR 41k and INR 38k respectively) than their peers' (NBFC-MFI average ticket size at INR 23k), implying a less granular portfolio. As the RBI's narrative shifts towards responsible lending and a genuine build-out of credit coverage in low-income households, we expect banks with a meaningful MFI portfolio (primarily BANDHAN and UJJIVAN in our coverage universe) to be adversely impacted on parameters such as portfolio growth and operating efficiencies.

Source : Equity Bulls

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