From “will be multibaggers” to “happy to not ever have them”
Samir Arora has staged a dramatic somersault.
In May 2016, he confidently declared that micro-finance stocks will be multibaggers.
He propounded the unique theory that so long as one continued to fund the micro-finance borrowers, there was no risk of a default.
“… let’s be shameless about it from stock market point of view, till you continue to put more money, the old guy will never default …”
He also opined that as the NBFCs would effortlessly churn out earnings, they are destined to become multibaggers.
“All the NBFCs we own without any efforts will grow their earnings literally by 20 per cent plus every quarter not over the previous year but on quarter-on-quarter basis“.
However, Samir Arora is now singing a different tune. He stated that he has “permanently shifted” and “would be happy to not ever have them”.
“Microfinance, I used to own all the three of them till November. Now I would be happy to not ever have them. I have permanently shifted,” he said.
Demonetisation exposes fragile business model of MFIs?
Prima facie, demonetization appears to have sounded the death knell for micro-finance companies. Their customer base is highly dependent on cash. The non-availability of cash crippled their business and impacted their ability to repay loans to the MFI, giving rise to surging NPAs.
Demonetization has become a demon. Microfinance sector hit. Loan repayments down. Women SHGs are in deep trouble. https://t.co/wXGwJb2egF
— Gaurav Gogoi (@GauravGogoiAsm) December 23, 2016
Law to curb “harassment” by MFIs
Samir Arora may also have been spooked by the proposed law to curb “harassment” by micro-finance companies.
“We plan to bring MFIs under State Act,” Deepak Kesarkar, Minister of State for Home, Maharashtra, has stated.
— historia (@restodehistoria) December 21, 2016
Ramesh Damani has already junked micro-finance as a ‘nonsense’ business model
Ramesh Damani was amongst the first to sound the warning bell. He was very eloquent in his criticism of the business model followed by MFIs. He said:
“… my problem with the microfinance area is that first you are borrowing money from the regular bankers and selling it at a higher rate which of course doesn’t make sense as a business model to me. If you see the peer-to-peer landing platforms in America they have all been now under pressure. Secondly, what microfinance assumes is that every person that you lent money to is an entrepreneur that he can go out and give you a return on capital so there will be a very low amount of non-performing debts. My personal sense and I could be completely wrong that this is better left in the NGO sector and the social sector rather than the stock market the idea that every entrepreneur take money and return it back at a higher rate of interest doesn’t make imminent sense to me.”
Shyam Sekhar called micro-finance a business of “organized usury”
Shyam Sekhar, the noted value investor, was also savage in his criticism of micro-finance companies. He contemptuously described it as a business of “organized usury”.
“A micro-finance company has zero stakeholders (depositors) on one side and all stakeholders (borrowers) ranged on the other side …..
What happened in Andhra Pradesh (where the Government banned recovery by MFIs owing to a spate of suicides from over-indebtedness) can happen anytime, anywhere in the Country ….
micro-finance is “structurally a weak business and lacks the management bandwidth to manage growth in a prudent manner ….
The business has no future in an era of falling interest rates …
I would not give a PE multiple to usury … that’s my simple view on microfinance” Shyam Sekhar said.
NO. Lending usuriously to Have-nots is most noble, highly profitable and a National priority. So, Accounting its profits shall take license. https://t.co/oPzXx8pxZs
— Shyam Sekhar (@shyamsek) March 7, 2017
Daljeet Kohli warns of political interference
“I do not like this business model of going into microfinance because mainly my concern is that these deals with very poor people and therefore there is always a very high risk of political intervention from various political parties,” Daljeet said bluntly.
Micro finance stocks are the new Tulip mania 😂
— Vivek Pandey (@IVivekPandey) July 5, 2016
Micro-finance stocks will sink like a stone: Religare
Parag Jariwala and Vikesh Mehta of Religare Institutional Research have issued a detailed research report in which they have exposed several alleged deficiencies in the manner in which micro-finance companies conduct business.
One of the shocking allegations is that loans are given to all and sundry with no regard to the credit worthiness of the borrower. It is also alleged that the borrowers are able to go to several micro-finance companies at the same time and pocket funds from all of them without the companies having the means to cross-check who has lent what amount to a particular borrower.
Crisis looms over micro-finance sector in South India
According to the ET, the drought in Karnataka has impacted the loan repayment capacity of the borrowers and created a “stress point”.
“There is crisis in some pockets, especially in North Karnataka, where political interference has also created trouble for the sector,” a top functionary of a MFI was quoted as saying.
Why pay loans when there will be a waiver?
The announcement by the UP Government to waive loans of farmers aggregating Rs. 36,369 crore has understandably generated a clamour for waiver in other States as well.
RIP Microfinance companies in UP
— Mëëřå 👼 (@imeerage) April 5, 2017
The farmers in Tamil Nadu and Maharashtra are reluctant to pay their debts, in anticipation that there will be a waiver if they don’t.
Loan waiver is like reservation .. one gets another demands for the same.
— Sudhir Shukla (@SudhirShukla_) April 8, 2017
Our agriculture policy is broken.Fiscal spend on Subsidy,Price Support.No tax on upside(profit), loss protection on downside(loan waiver)
— Vetri Subramaniam (@VetriSmv) April 6, 2017
In this scenario, what is the hope of MFIs being able to exercise coercive measures to recover their loans. If there are no coercive measures who will volunteer to pay?
@SaffronDalit Loan waiver encourage farmers to not repay the loan. They think, someday govt will waive the loan .no need to pay..
— Raja (@rajaraman26) March 28, 2017
Is Basant Maheshwari the last man standing on the sinking MFI boat?
In the past, Basant Maheshwari has come out with all guns blazing in favour of micro-finance stocks.
“… the small finance segment personally I am super bullish and we own almost all of them …. the microfinance segment .. that’s the place to be,” he had said.
Retweeted ET NOW (@ETNOWlive):
— Basant Maheshwari (@BMTheEquityDesk) October 30, 2016
The surprising aspect is that Basant stayed unfazed by the impact of demonetization on the micro-finance companies. Instead, he defiantly declared that he is not making any changes to his NBFC portfolio.
— CNBC-TV18 (@CNBCTV18Live) December 19, 2016
However, Basant is known for his ability to change his mind quickly and jettison stocks that fall out of favour.
Prima facie, most experts are unanimous in their condemnation of micro-finance stocks. It may be better for us also to err on the side of caution and jettison these stocks when the going is still good!