UP Farm loan waiver - A warning bell for Micro Finance Lenders

" First an apology, I am not a good writer so the write up may not be upto the VP standards. Mods feel free to delete the thread if you feel its not good"

My logic for investing into Mico Fin sector:

  1. Incredible spreads, no matter what you say the spreads on these loans were good and they are making good money. Ethical or not a matter or personal belief but I see no wrong in this. So business model wise good place. Especially after they were being regulated by RBI.

  2. Good growth and size of opportunity: So most of these companies had good growth (+30%) and the opportunity size too was quite good (they compete with money lenders)

  3. Good companies, professionally manged, with good disclosures

  4. They basically lend to people at bottom of pyramid and mostly to women. This customer profile is usually more honest then billionaires like VM, Ruia, etc…Mostly they try pay and have intention to pay

  5. Over all I was confident in the growth of all these companies and consequently invested and made good money.

Why I have turned bearish on the Micro Finance Lender:

  1. Political patronage: Politicians across party lines and across the country are now encouraging their vote bank which is mostly poor people to not to pay their loans, as if their party comes to power they will waive all the loans

  2. These days due to intense srunity of media, the party which comes to power tries to full fill their promises initially. So just like UP if a promise of waiver is made then it is an easy promise to full fill, since it just require a ressolution to be passed and no one will oppose. The money is not a problem, raise debt, push the liability to the middle class, no one will notice, no one will oppose. Increase taxes on petrol, ignore infra expenses and life will chugg along…

  3. Slowly this loan waiver is becoming a norm and things will go worse from here IMHO

  4. So it can become a culture in poor people to not to repay their debt and ever 5 years some waiver scheme will come and they will enjoy

  5. Waiver scheme makes honest people look foolish and they vow to take revenge and will wait for next opportunity to not to repay

  6. Suddenly delinquencies will increase, remember right now, lenders are using the window from RBI to not to recognize, I am sure this quarter we will observe a rise in delinquencies starting this Q.

  7. Valuations are very high, and if market get a sense of any potential increase in MFI, they can fall like a pack of cards.

  8. So IMHO the risks outweigh the rewards and I reserve the right to be wrong, do your own research and views invited.

Disc: I work in a NBFC which used to lends to Micro Fin companies and now has stoppled lending to the sector altogether.


But it isn’t the first time farm loan waiver has been there. It has been there for many times and MFIs have learnt to cope with it. Arent we stretching it a bit far?

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The question then is who will serve the under served,…RBI sees a gap where credit does not reach the poor and hence these banks were setup. Earlier they used to take credit at a much higher rate from private creditors and repay the loans inspite of farm loan waivers. I see this as an opportunity to buy bucket loads of SFB. Even RBI governor and SBI chairman has called loan waivers as Moral Hazards and spoiling credit discipline. For ex: Ujjivan has little to no exposure to farmers. We need to see the customer segment as well before calling all MFI and SFB will suffer.

Invested in Ujjivan. Views may be biased.


In case if any systemic risk, no one would be spared even if they are not exposed to farmers there is still exposure to poor people and market will punish all and sundry. This quarterly result would be eagerly awaited.

This quarter would not have loan book growth…Ujjivan mgmt has cleared it. The mgmt is ethical. They said due to demonitisation effect we were keep to control the loan book growth. However, he sees a rebound from March. So, I advise you to watch 2 quarters before making a conclusion on throwing mfi and SFB in the dock.

How does one clearly distinguish between an NBFC and Micro finance company. Could you pl share some examples from the listed space.

From the regulatory aspect, a MFI is a type of NBFC which has more beneficial provisioning norms( https://www.rbi.org.in/scripts/FAQView.aspx?Id=92) but regulating interest rates charged to borrowers within a 4% range. While other NBFCs have generally a more stringent framework https://www.rbi.org.in/scripts/FAQView.aspx?Id=92

From the listed sector, I perceive companies like Bajaj Finance, gold loan companies etc with a urban bias to be perceived as NBFCs, while those with a rural bias to be called MFIs. But business model wise, both are non banks, and no significant difference in my view

The premise is wrong . Though loan waiver is being offered govt is issuing bonds & will pay banks in the name of farmers . So its the UP taxpayers footing the bill & not NBFC & MFI . Also with RBI & Aadhar linked to every bank account it will make the collateral less account more secured .

Disc : Invested in few names.

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Does anyone know the mechanics of how the loan will be waived ? That’s an important piece of info I think

I think the loan waiver will definitely have some impact on MFI’s affecting their collection to some extent and the market sentiment for MFI’s. Loan waiver demands are coming from Tamil nadu, Maharashtra and Punjab as well. This is becoming a norm for farmers.
But these things are going to affect the banks as well.

However, it is difficult to ascertain the magnitude of impact.

There have been several instances in the past which have led to some sort of crisis for MFI’s but so far they have come out well.

I don’t think present valuations are high for MFI’s as compared to private banks. But I do agree there is a possibility of the valuations going down.

When demonetisation , real estate was expected to be hit hard but the real estate stocks have delivered good returns on the contrary.

I have one question, in case of loan waiver, the govt is supposed to pay the banks or NBFC’s in instalments. Now suppose the govt pays the money after 2 years, does it pay any interest on the late payment or just the principal.

SKS Microfinance has reported a horrible set of numbers. Is this just the start?