After demonetization in 2016, Moratorium offered due to lockdown is the first major setback faced by CreditAccess Grameen Ltd(CAGL) and microfinance industry in general. I will try to explain the details in the blog ” CreditAccess Grameen Limited- Q4FY20 Analysis”.
As explained in my earlier blogs, that the business model of microfinance is quite robust, highly process driven and can only be impacted by large economy wide events such as Andhra Pradesh Microfinance crisis of 2010, Demonetization of 2016 and now COVID related situation (Lockdown & Moratorium) in 2020.
I also have written a couple of blogs on Microfinance & CreditAccess Grameen Ltd.
You can read those here:
CreditAccess Grameen Limited- Q4FY20 Analysis
Moratorium Offered by RBI
Looking at the potential job losses and loss of income caused by the lockdown, RBI offered the first moratorium on March 27th for 3 months starting March 1st to May 31st and the second one was announced on 22nd May 2020 from June 1st till August 31st 2020. Since, March EMI payment was done by almost everyone, so it was applicable only for April & May 2020.
Also, there will be no changes on the credit scores individual/entity for availing such moratorium.
Moratorium basically means temporary suspension of an activity. In our case, it was basically to avail the facility on not paying EMI(Interest+Principal) for the moratorium period. But the banks will be continue charging you for the unpaid EMI amounts. Basically, your interest payments increases but you will have a longer time period to pay.
RBI left it to the individual/entity to have the option to avail the moratorium or not.
You can read more about the implication of the moratorium here:
Financial institutions such as NBFC( Non- Banking Financial Institution) & MFI(Micro-Finance Institutions) usually borrow from Banks to lend to its customers. Since they are borrowing from banks, they need to pay interest to Banks. But because the payments these NBFC/MFI receive from their customers are delayed, their ability to pay banks(their creditor) gets hampered. So, they needed moratorium from banks.
But here on the contrary the RBI gave the choice to banks if they want to offer moratorium to these NBFC/MFI.
CreditAccess Grameen Limited- Q4FY20 Analysis
Impact of Moratorium offered by RBI on CAGL
Paying heed to the livelihood situation and looking at the complications involved, Creditaccess Grameen Ltd’s Management decided to give a blanket moratorium to all its borrowers for the month of April & May 2020. One of the major reason for the moratorium was the inability of the creditaccess grameen team to conduct weekly meetings(where the weekly collection was made in cash) due to several restrictions placed by the govt on the people movement and gathering.
THAT WOULD IMPLY THAT CAGL WILL NOT BE EARNING ANY NET INTEREST INCOME(NII) OR REVENUE FOR THESE 2 MONTHS.
Because of this blanket moratorium an amount of ₹466.2 Cr of interest is accrued during the moratorium period. It is to be collected from customers starting June 2020.
In terms of Banks giving CreditAccess Grameen moratorium, about 60% of lenders agreed for the first moratorium period and they are in discussion on the moratorium for second extended period announced by RBI.
The competitor Spandana Sphoorthy did not give any such moratorium and collected ₹165 cr during the months of April-May and expect to collect ₹300 cr in the month of june.
Only time can tell which strategy worked better.
CreditAccess Grameen Limited- Q4FY20 Analysis
Demonetization & its Impact on Microfinance Institutions
Going a bit back in time, the memories of Demonetization announced in November 2016 is still vivid. The banning of high currency notes led to a total collapse of business especially in Tier II & III cities as well as rural areas. It was just for 2 months and things were back to normal once enough cash was bought back into the system. Customers of the microfinance industry typically hold their earnings in cash and were ill-equipped to withstand such drastic economic changes.
Demonetization had impacted the asset quality but to a lesser extent compared to the AP ordinance(2010) as PAR (90)i.e NPA stood at 8.2% as of March 31, 2017 compared to 21.1% in fiscal year 2010-11 for the entire industry.
Coming to the impact of demonetization on CAGL:
Looking at the number, it looks like the company recognized all the bad assets by Q2FY18 and then business was as usual. I think they would have created the provision in Q1Fy18 and hence the lower profits.
Demonetization Impact on CreditAccess Grameen Ltd
Demonetization Impact on CAGL
CreditAccess Grameen Limited- Q4FY20 Analysis
CreditAccess Grameen Limited- Q4FY20 BUSINESS UPDATE
Acquisition of Madura MicroFinance Ltd(MMFL)
The company has completed the purchase of 76.08% stake in MMFL by paying INR 661.2 Cr on March 18th 2020 and now onwards, CAGL will show the numbers as consolidated. For Q4, the consolidated numbers for CAGL factored in the numbers of MMFL for last 12 days which I would think would be hardly any.
Because of the acquisition, Gross Loan Portfolio(GLP) increased by 2100 cr to almost 12,000 cr, borrower base increased by 12 lakh to 40.55 lakhs, branches increased by 464. This enhances the overall scale of the company and the management is likely to bring down the common fixed costs.
The GLP concentration in Karnataka declined from 52.6% to 40% but increased in Tamil Nadu from 10.4% to 19.9%. But still very well diversified.
CAGL earlier had 82% of its total customer base in rural area. Now, with the acquisition of MMFL which has 96% branches in rural areas, the current consolidated number for CAGL stands at 86%.
Company want to be focus only in rural areas where the competition is quite low.
CreditAccess Grameen Limited- Q4FY20 Analysis
Consolidated Financial Numbers CAGL i.e.(CAGL+MMFL)
The growth momentum of the company continued for even this quarter despite not been able to work in the last 10 days of the month. Consolidated Net Interest Income(NII) grew by 50.6% and standalone NII grew in excess of 45%.
Additional cost of ₹15.2cr related to the acquisition. I assume it would be investment banking fee for the advisor.
Impairment of financial instrument(or the credit cost) due to provision created for normal business growth & impact of external interference in two districts in coastal Karnataka in Q3 FY20, and floods in south Maharashtra and north Karnataka in Q2 FY20, totaling to ₹56.1 cr.
Created Provision of ₹82.9 cr for COVID 19 related shocks.
Not sure about the reason on the significant rise in finance cost(₹173.3cr) despite drop in borrowing cost. Will try to find out.: On this query the investor relationship management replied:
The absolute borrowing cost increased at a higher rate because of increase in the overall borrowing amount. Our debt/equity increased from 2.0 to 2.9. Last year the leverage was lower due to IPO done in FY19. As per our internal policy, we can take our debt/equity to around 4.0 times, post which we shall go for equity raise.
To verify this, I checked the company’s presentation: Company’s borrowing increased by 3044 cr that is 74% increase whereas loan disbursement increase by only 43%. Even if the company has not lent out to its borrowers and if the amount is sitting on its book, they need to pay interest on it. That explains the increase in borrowing cost.
Due to the significant drop in profitability caused by mainly the COVID & some other related provisioning, acquisition transaction cost and higher borrowing cost, the various ratios has gone down. Management expect it to recover by the next 2 quarters.
CreditAccess Grameen Limited- Q4FY20 Analysis
CreditAccess Grameen Limited- Q4FY20 update
According to the management, with the moratorium, reduction in any sort of discretionary expenses as well as most of the rural business activity starting 1st week of May 2020, the borrowers would be well placed to clear the dues.
Also, most of the rural activities came under essential ones.
During the moratorium months of Apr-May, the company was still conducting the weekly center meetings and they did a survey on how many lenders would like to go for moratorium once the collection starts from June 1st.
According to the survey, 70% of the existing customer will prefer to repay the accrued interest , 20% may take a few more weeks to start repayment of the accrued interest and the remaining 10% is likely to go for the moratorium offered by RBI.
The company collects payment on a weekly basis and the 1st 2-3 weeks of June will be for accrued interest collection and then normal EMIs will start running. The company is also offering top up loan of ₹10-15k to borrowers to restart their lives.
As of June 1st, 98% branches are open with ~90% staff.
In the Covid scenario, the company is still conduction weekly center meeting with reduced strength(One fourth of the center size) and the representative of each group will collect the payment and pay at the center meeting on others behalf. The average collection amount per head per week is about ₹500.
Resilience is at the bottom of the pyramid as they have to fight on their own for their & their family’s survival and will have to bounce back on their feet soon.
The collection efficiency for Q4FY20 was at 98%.
CreditAccess Grameen Limited- Q4FY20 Analysis
The management’s execution till date has been exceptional and have already navigated much more severe problem such as that of Andhra Pradesh crisis of 2010 and moderately severe problem caused by Demonetization of 2016.
I think Q1FY20 is already a washout with 2 out of 3 months of Zero income, by Q2 things will start to normalize and by Q3, I hope business will be as usual. Also, the additional provision created(₹83cr) by the company most likely will take care of any future delinquencies. Given the business model of the company, the borrowers would be vary of defaulting i.e. they would not be able to get any further loan from any Micro finance institute.
But there would certainly be some defaults coming from the small urban portfolio which include borrowers such as Small shops, Eatery shops, Roadside vendors who would have shut their shop or lost their livelihoods due to lockdown and some rural portfolio as well.
Further reading:
Quarterly Result analysis:
Knowledge Bytes: