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00:00We have Jignesh Shial, Director Research and Head of BFSI at INCRED Capital to talk to
00:06us about everything that's happening in MFI as well as MSME, whether there is asset quality
00:12concern, how long should those concerns linger for, what are the players within that sector
00:19which look interesting. So, Jignesh, first off, good morning. I want to quickly ask you,
00:24first, is this concern something which is temporary, short term or do you expect this
00:31to linger for a longer period of time? Yeah, good morning Harsh and thanks for inviting me.
00:39Obviously, there had been a pain which is visible specifically in the MFI space since last
00:43two quarters technically and we think that this might stay at least for a couple of quarters.
00:49At least I think by 4Q or 525 or something, the pain might stay elevated or at least we should
00:57be able to see that overall bounces remaining a little higher than what we had seen in the last
01:03two years or two or three years, post which then again we need to analyse whether things are
01:09settling down or not and becoming stable. But at least for next two or three quarters,
01:13we see the pain might stay. And do you believe this is due to the faster growth
01:20clocked by the sector in the last couple of years? What is leading to these issues? Maybe the top
01:25two or three reasons, there may be several, but maybe the top two or three would stand out for
01:29you. Absolutely, April 22, if you remember, RBI has basically relaxed the norms for MFIs whereby
01:37they had given relaxation on interest that they can charge, also they can become a third or fourth
01:42borrower, a third or fourth lender to the same borrower and family income has been extended and
01:48all. So, obviously, that was a big opportunity that has happened for most of the MFIs,
01:52NBFs MFIs and all, who were struggling to compete with small finance banks and even
01:59banks and all in general because they did not have that kind of restrictions.
02:02The moment this restriction got lifted, obviously, there was overhitting which was
02:06supposed to happen. It took almost two years for them to continue growing at that particular pace
02:11and that basically overhitting or the over-leveraging is now getting reflected in the
02:14form of slip edges and all. Along with it, a slowdown or a kind of a relatively kind of
02:22weaker momentum or cyclicality which is generally visible in rural areas, that is also
02:27one of the reasons why we are seeing a pain which is visible in MFI space. But particularly,
02:32the key reason what we believe is, is the overhitting that has happened post
02:36RBI regulations softened up for NBFC MFIs. So, Jignesh, both demand as well as supply driven?
02:46Yeah, basically, it is a combination of both. Even lenders became too aggressive to lend and
02:51that basically has caused them a bit of a problem. Also, this book generally means
02:56so geographical concentrated, you generally have one or two or three states which basically
03:01occupies almost like 40-50% of your book. So, any particular state sees some kind of pain
03:06your overall entire portfolio sees, starts seeing kind of issues overall altogether.
03:11So, I think it is a combination of both. There had been an aggressive demand from the borrowers
03:15as well as the suppliers also. I mean, basically, lenders also grew.
03:21Right. Talk to us about geographies and talk to us about concentration. So, there
03:26we have a medium-sized bank in the northeast which has faced issues and that drag on the balance
03:33sheet continues even as we speak. Of course, stock performance has followed suit. You also
03:40have certain smaller NBFC lenders concentrated in geographies. It is a large risk. Is the northeast
03:47currently getting better in your view and which are those geographies which are key concerns
03:52that you are looking at? Look, so pain had been there
03:56in certain states in north rather than northeast. Basically, what we saw was there in Punjab and
04:02Haryana, where there had been a bit of a pain which was visible since last almost three quarters
04:05now. Apart from it, you know, certain pockets in northeast, certain pockets in east, central and
04:12eastern India has also seen a kind of a pain. But overall, it seems to be it is now, right now,
04:17what we are seeing is more across all regions and all states are seeing some kind of pain which is
04:24visible out here. But obviously, certain states in north and certain states in northeast still
04:29looks to be a little bit more tight here. Even RBI has restricted NBFC MFI, I think,
04:36last couple of months ago to increase their exposure in UPNVR. So, even they are sensing
04:41a kind of a pain which is getting built up in this particular state. So, right now, I think
04:45there had been a trend which was far more visible earlier that particular states are getting a kind
04:50of stress. But right now, I think more or less it is spread across all the states and all the areas
04:57across India. Jignesh, you know, every time there is an asset quality problem in a particular
05:05segment or sector within lending, you have one set of lenders which will continue to grow well
05:12and stand out, those who are able to preserve asset quality. Give us some names which you
05:16believe will be able to preserve it in this cycle. If you ask specifically on NBFC MFI,
05:25I think, according to what we see, Credex Gram in Germany had been reflecting pretty
05:32stronger set of underwriting and they generally what on the grounds they call it is a golden
05:38standard as far as lending is concerned. But obviously, they will also see if it is across
05:44areas, they will also see kind of some volatility. But I think compared to the rest of the guys,
05:49they could still do better. That would be a standout name, according to me, which will be
05:54there. Swannaswati is another name. But I think there, I think some volatility will be visible
06:00because they have been spreading or increasing the exposure across areas more recently. So,
06:06I think there could be some pain out there. But I think Credex is the one followed by Swannaswati,
06:11who should do, I mean, this both teams comes out very clearly, which can do better. But if it is,
06:17again I am saying, if it is a sector specific issue, the headwinds will be visible for most
06:21of the guys including Credex and Fundana as well. And Jignesh, any possibility of this spilling over
06:26to other areas, other pockets of lending or not really seen right now? No, no, possible,
06:33quite possible. I think small ticket size, personal loans or macro enterprise loans and
06:37all, they are already seeing some kind of pain which is continuing. I think the game is also
06:42about liquidity as well. I mean, we believe that if overall liquidity starts improving within the
06:48system and they are able to refinance it again, most of the borrowers, then I think the issue
06:55will not continue for a long period of time and then it should start settling down. And obviously,
07:01if the economy overall picks up pretty well, I think the thing should normalize in the next
07:06two or three quarters. But if it doesn't happen, then definitely it will go for a long. But this
07:11MFIP generally spills over to small enterprise loans and micro enterprise loans and all. So,
07:17that will definitely happen in the coming quarters. Okay, thank you so much Jignesh.
07:22It has been a pleasure speaking with you, breaking this down.