Microfinance Sector Sees Sharp Decline Amid Rising Defaults
Mumbai, Oct 24 (APN News Network) - The microfinance sector is facing a severe downturn, with several small finance banks and non-banking finance companies (NBFCs) involved in microlending witnessing declines of 30-50% in loan disbursements. Over 10% of total microfinance loans, valued at over ₹4.32 trillion, remain unpaid for more than 90 days.
Industry experts attribute the downturn to growing concerns over "evergreening," a practice where lenders issue additional loans to borrowers who are struggling to repay their existing debts. This tactic conceals defaults and poses risks of cascading defaults if the practice is halted. Moreover, borrower overleveraging has become a significant risk, with many individuals taking loans from multiple lenders in states such as Bihar, Uttar Pradesh, Karnataka, and Odisha.
However, not all microfinance companies are equally affected by this downturn. Several players with robust fundamentals and a history of strong asset quality have shown resilience and maintained better-than-industry asset quality and adequate capital buffers.
The key investment metrics for these four stocks - Equitas Small Finance Bank, Ujjivan Small Finance Bank, CreditAccess Grameen Ltd, and Arman Financial Services Ltd - include lower NPA ratios compared to peers in previous crises, healthy capital adequacy ratios, and diversified loan book compositions. These factors indicate that they may be worth monitoring for potential investment opportunities.
According to industry reports, these four lenders have outperformed the industry in previous cycles, with Equitas Small Finance Bank estimating that around 50% of loans overdue by 90 days eventually become non-performing assets (NPA). However, even conservative assumptions suggest that "this time it's different" pose risks to investors.
As the microfinance sector continues to grapple with this crisis, investors are advised to exercise caution and conduct thorough research before making any investment decisions.
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