Overview of Microfinance Stress at Equitas Small Finance Bank
The primary concern is the elevated delinquencies in the microfinance portfolio.
Increased Slippages: The bank’s management acknowledges that microfinance asset quality is a concern, as slippages continue to be high. Gross slippages were 4.49% for Q1FY25, exceeding the bank’s comfort level of 4%. The microfinance portfolio contributed INR 85 crores to slippages in this quarter, a significant increase from INR 35 crores in the same period last year.
Impact on Credit Costs: The elevated slippages have led to a spike in credit costs for Q1FY25. The bank created a floating provision of INR 180 crores to align with the latest RBI guidelines for Small Finance Banks (SFBs) aiming to convert into Universal Banks. Excluding this provision, credit costs were 1.44%, with microfinance contributing INR 62 crores.
Reduced Disbursements: The bank has slowed down disbursements in the microfinance segment due to the challenging environment. Disbursements in this segment declined by 29% year-on-year.
Impact on Net Interest Margin (NIM): The reduced disbursement in the higher-yielding microfinance segment has contributed to a sequential decline in NIMs.
Factors Contributing to Microfinance Stress:
Industry-wide Issue: The management highlights that the stress in microfinance is a fundamental issue impacting the entire industry. This is unlike previous stress events triggered by external factors like demonetization or the COVID-19 pandemic.
Overlending and Increased Indebtedness: One of the key factors attributed to the stress is the increase in borrower indebtedness due to overlending practices in the industry. The implementation of uniform microfinance lending guidelines by the RBI is cited as a contributing factor. These guidelines led to an increase in the eligible loan amount for borrowers, which resulted in a rapid escalation of ticket sizes and overall borrower indebtedness as lenders competed to capture market share.
Lack of Discipline in Implementing the Code of Conduct: While industry players have signed a code of conduct to curb overlending, the bank’s management expresses concerns about its effectiveness on the ground level. The lack of strict adherence to the code is hindering efforts to control the rising delinquency levels.
Geographic Concentration of Stress: The stress is not uniformly distributed across all regions. The states of Punjab, Haryana, and Gujarat are experiencing significant problems. Certain branches in Maharashtra, Tamil Nadu (Erode), and other areas are also showing elevated stress levels.
Response to Microfinance Stress:
Focus on Micro-LAP: The bank is focusing on growing its Micro-LAP (Loan Against Property) portfolio within the Small Business Loans segment to compensate for the reduced focus on microfinance. Micro-LAP offers similar yields to microfinance and is considered a fully compliant Priority Sector Lending (PSL) product.
Cautious Approach to Microfinance Growth: The bank is exercising caution in disbursing new microfinance loans until there is more discipline in the sector. They aim to observe the industry’s collective efforts to improve discipline and monitor the effectiveness of the code of conduct before making any significant changes to their microfinance strategy.
Industry Collaboration: The bank is actively engaged in discussions with industry associations like Sa-Dhan, MFIN, and ASFB to address the stress in the microfinance sector. The goal is to collectively enforce the code of conduct and encourage responsible lending practices to restore stability to the industry.
Strengthening Collections: The bank is bolstering its collection efforts to improve the situation. This includes strategies like:
Increasing staff dedicated to collections.
Segmenting collections efforts by delinquency buckets.
Focusing on the underperforming Vehicle Finance segment.
Future Outlook:
The management expects to gain more clarity on the microfinance situation in the next two months. The trajectory of credit costs and microfinance mix will depend on whether the industry can effectively address the overlending issue and improve collection efficiency.
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