Deterioration in credit discipline more detrimental to MFIs than rural focussed NBFCs

Rising instances of farm loan waivers in many states which are facing elections in the next couple years may affect credit discipline of rural borrowers, a development that weighed on the stocks of NBFCs such as Mahindra and Mahindra Financial ServicesBSE 0.50 % (MMFS), Shriram Transport FinanceBSE 1.28 % (STFC) and micro finance players such as Bharat Financial Inclusion (BFIL) in the last two trading sessions.However, unlike NBFCs for which the loan is secured in nature backed by assets like tractors, and commercial vehicles and the quantum of loans are bigger, the deteriorating credit culture may be a bigger worry for MFIs that have already seen 20% to 35% correction in the consensus earnings expectations for FY18 in this calendar year.The management of rural-focused NBFCs appear confident that farm loan waivers are less likely to impact the credit discipline amongst their borrowers even as some may try to take advantage of the prevailing sentiments.According to Umesh Revankar, MD & CEO of Shriram Transport Finance, even as loan waivers affect rural credit discipline, payment from assets is not a challenge that cannot be handled. He said that while some elements may try to take advantage of the situation, such instances are unlikely to impact the company’s outlook on loan growth (12% to 15% for FY18) and asset quality) for the fiscal.“Borrowers’ expectations of waivers are from the government and not banks and institutions like us. For our business, cyclical factor like a drought that affected Karnataka and Tamil Nadu last year is far bigger a challenge than change in credit discipline due to such waivers,” said Revankar.