A few recent media articles have reported about the Jharkhand government's announcement of a farm loan waiver. We note that this is not a new scheme, but an extension of a scheme in force since FY2021 (the waiver limit now raised from Rs50,000 to Rs200,000). However, this scheme is applicable only to standard crop loans availed until March 31, 2020; it is not applicable to microfinance loans. Given the scope of this scheme, we assess a negligible impact on microfinance loan portfolios of lenders under coverage.
Jharkhand government widens coverage of farm loan waiver scheme
In its budget for FY2025 unveiled in February 2024, the Jharkhand government announced an enhancement (the waiver limit hiked from Rs50,000 to Rs200,000 now) in its existing farm loan waiver scheme. While this loan waiver scheme has been in force since FY2021, and the enhancement was announced in February itself, a few media reports (link 1 and link2) have highlighted this news recently. These reports also indicate that the state government has already paid ~Rs19 bn to ~0.47 mn farmers under this scheme, and it now plans to close all NPA farm loan accounts to make farmers debt-free. The state government has budgeted ~Rs0.35 bn in FY2024-25 for this scheme.
Waiver applies to crop loans, not a concern for microfinance loans
The Jharkhand government's loan waiver scheme applies to crop loans for farmers residing in the state; it does not cover microfinance loans. While the scheme came into force in FY2021, we have not observed any noticeable effect on microfinance delinquency levels in the state (Exhibit 1), which allays concerns about incremental deterioration in credit culture. We understand that such farm loan waiver schemes have been announced by a few other state governments in the past, but they generally do not cover microfinance loans.
Microfinance industry has been cyclical with sensitivity to several factors
The microfinance business has always been cyclical because of the high vulnerability of borrowers at the bottom of the pyramid. The sensitivity to adverse weather-related conditions (cyclones, floods, droughts, heat waves, etc.), political events (farm loan waivers and election-related disturbances), macroeconomic situation (economic growth, inflation, etc.) and operating conditions (festive holidays, harvesting season, wedding season, employee attrition, lockdown, etc.) tends to be very high. As a result, the number of variables to monitor from an investment perspective is large, even though this sector presents a potential for strong growth and high profitability. We have already baked in the high uncertainty in the business outlook through a higher cost of equity (Exhibit 2) for these companies. Nevertheless, our view of the microfinance sector remains tactical, given the potential to make strong returns depending on a favorable entry and exit point. As highlighted in our recent report, we believe that the sector is currently placed reasonably well from an asset-quality perspective, and select stocks offer an opportunity to make healthy returns in the medium term. We prefer Bandhan and Utkarsh SFB among the microfinance-led banks under our coverage. |
