Farm Loan Waiver Hopes Have Hurt Microfinance Repayments, Says Equitas

Small finance bank and microfinance lender Equitas Holdings Ltd. said the company’s provisions are expected to rise as borrowers in some states have stopped repayments on hopes of farm loan waivers.

“Ground-level situation continues to be volatile… defaults have come down but are not at sustainable levels,” Raghavan HKN, president-inclusive and outreach banking, Equitas Ltd, told BloombergQuint.

The company’s net profit fell 86 percent to Rs 6.9 crore in the quarter ended March as provisions more than doubled from a year ago to Rs 36.5 crore and rose 7.5 percent compared to the previous quarter. Profit was a fifth of the consensus estimates of analysts tracked by Bloomberg.

The Bharatiya Janata Party government in Uttar Pradesh recently announced a loan waiver for small and marginal farmers, an election promise made by Prime Minister Narendra Modi. Though the state said it will fund the waiver by issuing bonds, the decision triggered similar waiver demands in other states like Maharashtra. Bankers, including Reserve Bank of India governor Urjit Patel, have warned that the such waivers only hurt credit discipline.

Bharat Financial Inclusion Ltd., India’s biggest micro-lender, and small finance bank Ujjivan Financial Services Ltd. also saw bad loans rise.

Gross non-performing assets at Equitas rose from 2.46 percent in the October-December period to 3.53 percent in the fourth quarter. Most of the additional NPAs came from microfinance business and loans against property. Asset quality in other businesses remained stable, Raghavan said.

Repayments Hit

Raghavan said though the company kept aside Rs 50 crore as provisions in October-March, additional requirements may remain high and will depend on how the microfinance loans behave.

While the overall collection efficiency during the quarter stood at 95.4 percent, Maharashtra, Karnataka and Madhya Pradesh continued to witness repayments pressure, with collection efficiency of 74 percent, 82 percent and 86 percent, respectively. These states are witnessing issues due to farm loan waiver demands, which has hurt credit culture, and not due to demonetisation, the company said.

Other expenses during the quarter doubled to Rs 63 crore due to opening of branches under its small finance bank business. While the current cost-to-income ratio stands at 80 percent, “we should be able to reach steady state of costs by end of Q2FY18”, said Raghavan.

The company’s total income from operations rose 24.3 percent year-on-year to Rs 398 crore. Assets under management (AUM) grew to Rs 7,176 crore compared to Rs 6,125 crore in the previous year.

The company has forecast a 15 percent growth in assets under management in 2017-18 at consolidated level, with most of it coming from the used commercial vehicle finance business and micro-SME loans, which is more than half of its current portfolio. The company has introduced new products such as business loans, agricultural loans and loan against gold and is expecting significant traction on this product portfolio which stands at Rs 100 crore now.

Branch Expansion

The small finance bank, which commenced operations in September last year, had 284 active branches and 55,000 customers as of March compared to 109 branches at the end of December. The company aims to reach a target of 375 branches by the end of September 2017, adding 90 branches over the next two quarters, which would keep operating expenses high.

However, the company has put on hold its plan to add another 80 branches from September 2017 to March 2018, and wait for existing branches to ramp-up and expenses to stabilise.

Equitas Small Finance Bank created a deposit base of Rs 1,900 crore as of 31 March 2017, of which the share of low-cost deposits stands at 17 percent. The bank, which has 50 percent of its branches concentrated in south India, has not yet seen any significant impact from the drought in south India given that they have just recently started offering agri loans.