Elara Securities India - Banking & Financials - Retail loans to MFI borrower a risky affair - Sector Update

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Around >14% of MFI borrowers with other loans portend risks

MFI borrowers, who have other active retail loan, are a cause for potential concern, as it may result in higher leverage. A few key pointers are: 1) 14% of MFI borrowers have other loans worth INR 1.7tn (over & above INR 4.4tn of MFI loans) grew by 10% YoY (a 6% rise in ticket size), 2) gold (~23% of loans), housing (~19% of loans) and agri KCC (~13% of loans) form the larger chunk, but growth has been high in personal loans, which were up 38% YoY in FY24 (currently 9% of loans), and 3) Tamil Nadu (~39% of loans) & Karnataka (~15% of loans) are large contributors. Loans asset quality is sketchy, as 1) PAR30+ is at 8.1%, 2) product-wise, PAR30+ is higher than normal retail loans for all products, such as housing (PAR30+ is at >10% vs sub-3% for other retail loans), tractor (PAR30+ is at 11.7% vs 6% for other loans), and 3) state-wise the highest PAR30+ is in Kerala at 7.4%, followed by Maharashtra & Uttar Pradesh at 6% each. These red flags may emanate from contingent exposure, which makes leverage assessment tricky.

Consumer leverage, some States point at red flags

Details highlight red flags that need monitoring. They include: 1) sustained rise in leverage - average balance per borrower rose to INR 50,900 as on Q4, with further move to higher ticket size (proportion of book in >INR 50,000 has risen to 42.3%, up from 40% in Q3), 2) roll forward rates have increased and roll-back rates have reduced in the early delinquencies bucket, 3) 30+DPD has risen to 2.1% from 2.0% in Q3FY24. State-wise details suggest red flags in Kerala (30+DPD rising to 5%), Rajasthan (30+DPD rising to 3.6%) and Tamil Nadu (30+DPD rising to 2.1%), 4) 12.3% borrowers have >4 active loans, led by Karnataka, Odisha & Kerala wherein delinquencies can rise more than 5%, 5) Kerala has seen a deterioration (there has been a rise in the worst-performing districts to five in Q4 from 1 in Q2), and 6) among the five best performing lenders, 30 DPD has risen to 0.9% from 0.4% a quarter ag). We believe it is important to understand cycles in MFI. While the overall trend is holding up, there are a few red flags (RBI has cautioned on MFI) that warrant monitoring as risk crystallization in MFI can be quick.

Headline asset quality holds up but some States need monitoring

Asset quality trends show red flags: PAR30+ has risen to 2.1% from 2.0% in Q3 with an increase across States (ex-West Bengal & Maharashtra). Among the worst-performing districts, five are in Kerala, and a rise in Punjab. Meanwhile, West Bengal has shown an improvement and Karnataka seems to be better off, but leverage needs a check as 19% of borrowers in Karnataka have more than four loans.

Growth sustains but moving toward higher ticket size

The industry continues with growth momentum, with 8.5% QoQ & 27% YoY rise in GLP and 4% QoQ & 23% YoY in loan accounts in Q4. We note: 1) higher disbursement to large ticket size segments - proportion rising toward INR 0.1mn ticket size from 0.2% in FY23 to 1.2% in FY24, 2) some States have sustained robust growth & penetration is questionable, and 3) the portfolio is becoming concentrated - 48 districts have GLP of >INR 20bn in Q4, up from 43 districts in Q3.

Source : Equity Bulls

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ElaraSecuritiesIndia Banking Financials RetailLoans MFI SectorUpdate