The recent or near-term political events in Assam and West Bengal have the potential to aggravate the challenging situation of overleverage, especially in these states. For the first time political parties in these two election bound states are talking specifically about microfinance (MFI) loan waivers, which has the potential to damage the long-term prospects of microfinance in India, says India Ratings and Research (Ind-Ra).
In a note, the ratings agency says, "While political movements in Assam in FY20 have been limited to a few districts, any clamour for microfinance loan waivers by political parties in the run-up to state assembly elections in 2021 could be debilitating for the industry in the state. This would be irrespective of the form of institution in the microfinance business and could have a long-term impact on the microfinance borrowers’ discipline."
"Finally, West Bengal is a state with almost three times larger MFI assets under management (AUM) than Assam’s and even rumours of microfinance loan waivers in the run-up to state assembly elections could significantly damage customer discipline in the near future as well as before successive elections even in other parts of the country, should political parties there follow suit. This has the potential to damage the long-term prospects of microfinance in India, if this rhetoric gains pace," Ind-Ra added.
Earlier, the ratings agency had indicated that the ticket size growth in West Bengal was higher than branch expansion and could result in a build-up of risk in the medium-long term, if the trend continues. Ind-Ra rated microfinance entities do not have a material presence in these two states.
Ind-Ra, in its state-wise ticket size and macroeconomics analysis, has observed that the average outstanding per unique borrower is the highest in West Bengal and Assam, and this has been the case at least for the past three years.
Also, Assam and West Bengal are among the top 10 states (by microfinance AUM across forms of institutions) with per capita net state gross domestic product (NSGDP) lower than the national average. In short, the ratings agency says, these two states have lower per capita SGDP than the national average, while the outstanding per unique borrower is higher than the national average by 21% and 35%, respectively.
"Furthermore, the trend generally observed is that the ticket size at the time of disbursement at portfolio level is about 50% higher than the average outstanding – this implies that the peak risk could be higher than that implied by average outstanding," Ind-Ra added.
According to the report, most non-dominant institutions have similar ticket sizes in both Assam and West Bengal. It says, "Banks on an average have disbursement ticket sizes per loan (loans per customer of 1.83 – all India average at end-September 2020) higher by about 20% than those of small finance banks (SFBs), non-banking financial companies (NBFCs) and NBFC-microfinance institutions (MFIs)."
Ind-Ra estimates 40%-50% of the microfinance loan portfolio in both Assam and West Bengal are from one institution; while Assam and West Bengal have about 20% of total microfinance loans, they constitute only 10%-11% of NBFC-MFIs’ AUM.
"Most other banks that have direct or indirect exposure to microfinance (assignment / pass through certificates and business correspondence models) have ticket size in line with most NBFC-MFIs or SFBs – this could explain the skew in average outstanding per customer in these two states," the ratings agency added.