A 15% to 20% loss in MFI loans may not lead to a subprime crisis but would certainly wipe out the networth of the MFI. It is unfair to compare MFIs with PSU banks, where ticket sizes are much larger and there is a sovereign guarantee. The MFI crisis in 2010 made it clear that politicians are going to favour borrowers and not MFIs in times of crisis; that is, MFIs do not have the implicit sovereign guarantee. In fact, if by subprime loans we mean MFI loans, then such an event may rightly be called a subprime crisis. I am not sure that using words like crash or disaster deserve such strong reaction.
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Politicians will do what public want. They won’t interfere if people are happy and willing to payback their loans.
During AP crisis, MFIs were not regulated and they were lending without any loan amount cap or # of loans per customer limit. Actual trigger for AP crisis was coercive collection process which led to a suicide and created lot of negativity about micro-finance companies. Since public was unhappy due to neck deep debt and aggressive collection process, politicians called for no more loan payments.
In current regulated environment, mfis are not allowed to do any of these things.
This doesn’t mean there will not be any negative event. Its just that regulated environment ensures past mistakes are not repeated which seems to be the main concern of most members.
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From the article posted by nleshtripathi in his post: "Viswanathan of Basix says MFI lending in Andhra rose from Rs 5,000-6,000 crore in 2009 to Rs 9,000 crore this year."
MFI lending in AP in 2010 was 9000 crores. What would be MFI lending in TN now? My guess is about 12000 crores, although I have not done a detailed analysis. This is in the same range of the lending in AP in 2010 (normalizing for the higher number of households in TN when compared to AP).
Also, “The stage was set. And then, a confluence of external factors triggered the present state of suicides.” Such external factors may not be obvious beforehand. They may or may not happen in a hurry. The trust in regulations and deepening of financial markets for poor in India are subjective calls, where our opinions may differ.
Penetration level is very high in TN. This is the reason I avoid MFIs which has lot of exposure to TN.
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Sharing a couple of blog posts about bubbles here since there appears to be a widespread consensus that the MFI sector is in its own bubble.
http://avc.com/2016/08/in-defense-of-bubbles
http://blog.tomevslin.com/2005/01/why_we_need_bub.html
Hi Gurjot,
It is not that whoever is talking about risks in MFIs is saying that MFIs are in a bubble. Neither is it true that these people are not invested in MFIs. For example, I was invested in SKS earlier and then switched to Ujjivan on the day of listing and later increased my holding. I am only saying that MF loans are unsecured and carry risks. MFIs claim that loans are for the purpose of income generation and not consumption. I have doubts if everyone in each village can become an entrepreneur because they have access to loans. Also, some MFIs have been giving more loans to existing borrowers than the interest that that is being charged. It is like paying borrowers to take loans and can create a serious moral hazard. There are other issues too. We need more work to differentiate between irresponsible and responsible MFIs.
Lastly, let us all avoid making caustic remarks. An unwillingness to consider alternate views is a hurdle in becoming a better investor.
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Interesting inputs from Mr. Lal - highly regarded IDFC head - on the multi year opportunity for NBFC’s
Did you know I am sure you have some sense that 45 percent of the outstanding credit of the banking system is only to 300 corporate and on the liabilities side 89 percent of all the current and savings account (CASA) mobilised by the entire banking system comes only from the top-50 cities in the country whereas 60 percent of the country’s household savings are not even in the banks. So, what this says is that there is a lot of work still to be done. There is a lot of opportunity to reach out to customer segments that are not covered either on the asset side or the liability side of the balance sheet. And if new players that are entering the banking industry, focus resolutely on this segment, it will do the country a great service and create value for all stakeholders.
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Here an interesting writeup on Microfinance in India – Can the dream run continue?
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Very Informative Interview PN Vasudevan, Equitas about the risk of MFI and How the concerns addressed and regulated by RBI now.
http://economictimes.indiatimes.com/articleshow/53751664.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
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Very balanced and cogent views, tahnks for sharing.
Very categorical view I found interesting:
"The kind of factors which were at play in 2010 in the particular state of Andhra which led to that ordinance being promulgated by the government, those kind of factors are actually not present anywhere in the country today. "
Read more at:
http://economictimes.indiatimes.com/articleshow/53751664.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
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Interesting “contra” call article. IMHO there is ZERO new analysis/content/information. We do get to learn the valued “view” of the analyst on risk reward. These days, almost feels like its fashionable to be bearish on MFI using AP crisis. First level thinking. Great that there is so much skepticism in teh price 
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The quality of research of the bearish “so called analysts” can be easily deciphered by seeing the past PAT trend, and their projected PAT trend for Ujjivan.
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Subash,
You might have done better research than me but FY17 EPS should be around 20. I did some number crunching. Assuming that their Cost to NII ratio will go to 60%, as from here on there will be spending a lot of money on IT infra and the reduction in NII as their funds from IPO will run out (All from management interviews from recent times). However I am still unsure how analysts calculated FY18 numbers since the company will start receiving cheap deposit money from there on. I recently added more stock of the company(at 435) assuming the exponential rise in savings. Views invited.
Thanks
Kanv
What I found missing in the article was the mention of loopholes in the current NBFC-MFI regulations of RBI. The regulations state that only 2 MFIs can lend to the same borrower and only upto a limit of 1 lacs. The problem here is that the unorganized sector lending and SHG lending is not under the purview of this regulation. The Credit Information Bureau has no data on this lending and it is estimated that unorganized lending is equal to if not more than the current size of the MFIs.
The AP crisis unfolded because this was one of the factors. The borrowers had credit from both MFIs and SHGs and when repayment capacity dropped they paid back MFIs first because they were pursuing aggressive repayment methods. The SHGs suffering from repayment woes called in government action to regulate the situation immediately.
While coercive methods have been regulated by the law the CIBs do not have complete data on the indebtedness of the borrowers and if and when their repayment capacity is affected, I wonder who will be left holding the ticking time bomb when its time has run out.
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Forget MFI, just tell me one single NBFCs who take into consideration of loans from unorganized sector (be it Individual/SME/Industry) when doing due diligence.
As far as I know, their number is ZERO, as it is impossible to get that data. So why single out MFIs for it.
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On a different note, I have heard that Equitas Microfinance is one of the few MFI that has APR rate printed on the passbook of borrower.
Subhash,
My point was not to single out MFIs, I have nothing against them. In fact, I want them to succeed and improve the robustness of the rural economy. I have a problem when the management of companies come forward in media and make bold predictions about how robust their systems and BMs are with no mention of the weaknesses in their practice. The CIB data is not robust and lending to EWS of the society is itself fraught with risks. Add to this the risk of over lending and you may have a crisis in the making. The management should have brought forward all the points rather than hide some and showcase their strengths. Investors who take the management talk at face value and then invest, deserve to know the whole story and all the risks before they invest.
Mr. Vasudevan’s statement, “we have a very strong credit bureau database now.” is wrong. That being said I am happy he pointed out that the contagion risk is still present in the MFI industry.
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How are you claiming that management of companies coming forward in media and promoting about BM without mentioning Risk? Have you gone through ARs of Ujjivan,Satin,Equitas,SKS ? Have you listened the concall of Ujjivan,Equitas,Arman ? Suggest you to go through ARs of the listed and unlisted MFIs of current year and Past years and also the Con Call before claiming no mention/hiding of weakness. What is your data point to make a such strong statement "CIB data is not robust" which is one of the integral part of the RBI promulgated regulation ??
It is now fashion to pass comments against MFI’s BM by mentioning AP crisis etc.I feel one should study the sector, regulations and companies in detail along with proper scuttlebutt.
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Hi Amitayu,
You are right I should have declared my sources before claiming that CIB data is not robust. My source is from the Religare research report on the Microfinance Sector in India. The report was shared in the very first post of this discussion on December 2015 and I had assumed you must have read it.
Hi Abhinav,
Wow, you have more trust of reports of Analysts, who had a sell call on SKS at a much lower level, than the actual guys who are running MFIs. Nice !!!
I have a counter-question. If CIB data is not robust, than how are these MFIs showing such low NPA levels?