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.
We plan to bring MFIs under State Act, says Maha minister – https://t.co/gFkbZ6fM38 https://t.co/VkWLm0BcnO
— 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):
.@BMTheEquityDesk: Bullish on mortgage finance, small finance bank, micro finance sector. #ETNOWExclusive
— 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.
. @BMTheEquityDesk #OnCNBCTV18:
My NBFC Portfolio Has Not Changed Due To #Demonetisation. Its Impact Should Ease In The Next 1-2 Months.— 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.
Conclusion
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!
Out of all issues raised two are valid.One is Political patronising of defaulters for votes and any issue of suecide by farmers is sufficient enough for govt to act.Second one is competion among microfinance companies.,which will become like people start borrowing from second to pay first. Second point is valid for rural centric NBFCs also.I don’t own any microfinance or rural centric stocks in my portfolio.Rural India is under stress ,so play only cash consumption like Rel Jio,HUL,ITC ,auto .I am happy to have Rel Capital ,DHFL,L& T Finance,Lic housing ,GIC housing in addition to Pvt sector banks in my portfolio to play financial sector.Stay away from microfinance.
Will this controversy lead to shut down of micro finance companies? I have doubts. Micro finance companies cater to that level of society where banks can’t lend because of regulatory requirements like surety etc.In my view microfinance is not usury but it saves very low level of society from exploitation of money lenders, whose interest charges are exorbitant.Even inability of farmers to repay bank loan has led to suicides. Should these tragic incidents lead to questioning the utility of banks ? I am of opinion that demand for microfinance companies does exist in country like ours,hence these companies will survive and grow.In fact they help banks in financial inclusion of entire society.
No doubt concept is good but completion among microfinance companies to show big Q o Q improvements in lending books in this highly vulnerable sector will lead to over borrowings by those who can not pay .Greed for higher valuations will lead to this.. Although microfinance problem will happen in rural sector,I anticipate similar problem for Pvt banks and NBFCs in retail bank also.Now Corporate lenders are struggling with NPAs,but by the time Corporate lenders problem of NPA will be resolved ,we will find many of NBFCs and some of Pvt banks with NPA problem ,as now for showing ,QoQ growth many of NBFC and few Pvt banks has become complacent in evaluating worthiness of borrowers.So in my view Banks should have ideally have balanced book of customers and should not focus on quality of customers.Many of NBFC ,l(I have heard )just have computer program to approve loans ,many of small time experts(ex employees of same companies) have emerged in market to guide poor quality borrowers to help them to take loans and people has already started taking loan from second to pay first .
No doubt concept is good but competion among microfinance companies to show big Q o Q improvements in lending books in this highly vulnerable sector will lead to over borrowings by those who can not pay .Greed for higher valuations will lead to this.. Although microfinance problem will happen in rural sector,I anticipate similar problem for Pvt banks and NBFCs in retail bank also.Now Corporate lenders are struggling with NPAs,but by the time Corporate lenders problem of NPA will be resolved ,we will find many of NBFCs and some of Pvt banks with NPA problem ,as now for showing ,QoQ growth many of NBFC and few Pvt banks has become complacent in evaluating worthiness of borrowers.So in my view Banks should have ideally have balanced book of customers and should not focus on poor quality of customers.Many of NBFC ,l(I have heard )just have computer program to approve loans ,many of small time experts(ex employees of same companies) have emerged in market to guide poor quality borrowers to help them to take loans and people has already started taking loan from second to pay first .
I mean no offence but are you the same member who was trying to prove me wrong when I was raising awareness about Ricoh India which now has been suspended from trading. Nothing personal I was just trying to refresh my memory.
I never tracked Ricoh and not aware about your any of awareness programs.More over it looks your memory is no more with you.
I have nothing personal against anybody that’s the precisely why I do not comment anymore. just when I see something which can be of help at large and is fact I try to write something.
BTW in the interest of full disclosure my name is not “bholu” and I am no expert on anything. I am just an aspiring Bhojpuri music singer. I guess this forum is not me
Due to one state waiver, the other states will also see demand for waivers.
micro-finance companies charge very high interest rates and exploit the poor. I think it is good move by Yogi Adityanath Ji to waive farm loans in UP. It is time the people of Uttar Pradesh got benefits of populist schemes. For long such schemes have not been implemented in the state.
I also want to state that Donald Trump is doing a great job as the president of the United States.
Only regret is that AAP lost in Punjab but one loss should not deter the party.
What about the concept of buying when the news is neagative ? Remember Bharat Financial inclusion made a low around 300 in 2014, and then the narrative changed
MICRO FINANCE IS THE THEME WHICH IS GOING TO STAY IN INDIA DUE TO REQUIREMENT OF FINANCIAL INCLUSION FOR THE RURAL POPULATION. THE DEMAND IS GOING TO STAY .ONE OFF EVENT OF DEMONETIZATION CAN NOT STOP THIS SECTOR FROM GROWING. EVEN IF THE FARM LOAN WAIVER HAPPENS , THAT WILL BE GOING TO BE POSITIVE FOR THE MICRO FINANCE SECTOR, AS THE MONEY WILL BE RAISED TO PAY BACK THE LOANS. THERE MAY BE TIME GAP , HOWEVER THE GOVT. WILL PAY BACK THE MONEY. AFTER ALL MICRO FINANCE COMPANIES ARE MEANT FOR BUSINESS , RBI HAS UNDERSTOOD THE FACT & HAVE GIVEN SFB LICENSE TO THESE COMPANIES.THIS BUSINESS IS GOING TO GROW. THERE IS TIME WISE HICCUPS, HOWEVER THIS WILL BE SORTED OUT.
IT SEEMS THAT VETERAN INVESTOR MR. SAMIR ARORA SOLD OFF AT LOWS IN NOVEMBER WHEN ALL THESE STOCK WERE AT LOWS UNDER DEEP PANIC AS IF THERE IS NO TOMORROW.
HE SHOULD NOT REGRET FOR IT.
I agree with you. Exploitative industries like micro-finance are usually very deep rooted and are based in the desire to earn super normal profits which is very alluring. Hence such industries are easily perpetuated. Also such industries target the weakest or the most needy to trap them in a vicious cycle. The RBI decision to award licenses to micro-finance companies is a political decision to put in mild terms, it really had nothing to do with financial inclusion. In fact RBI really had to encourage financial inclusion through new banks there are much stronger and well managed NBFCs which should have been awarded licenses. Anyways there are enough banks in India already, PSB, Pvt., RRB, Cooperatives, which can fulfill the cause of financial inclusion if the RBI were to lay suitable guidelines and implement them.
Very surprised at the negative view of the experts. What do banks do? Borrow (deposits) to lend to earn profits. MFIs too r in the same business albeit with a different model and mix of business. Go back to early ops and back. Banks were hardly lending for consumption (per segment). But now 40 to 50% of their lending is in retail segment.
People r still talking about demonetisation? A dead story deeply buried long back. Enough is enough. Please talk no more about demonetisation
And finally, please check once Nandan Nilekanis Whatsapp moment remarks on MFI. You will never miss any temporary negetivities to lap up MFI stocks at cheaper valuations.
Delighted to read so many stalWert’s vieW 0n St0ck exchangeS.