CreditAccess Grameen’s Q4 shows provision boost; second wave a worry

Microfinance institution CreditAccess Grameen Ltd’s March quarter performance showed the expected signs of recovery the period had seen before the pandemic’s second wave hit. The micro lender reported a healthy net profit growth despite setting aside a large amount for provisions.

Indeed, investors took the surge in provisions as a sign that the lender is insuring itself for future risk, especially when the second wave is resulting in lockdowns across the country. On a standalone basis, the company reported 14% growth in assets under management (AUM) for the March quarter and a sharp improvement in collection efficiencies. Madura Microfinance Ltd, which was acquired by CreditAccess Grameen in March last year, showed an AUM growth of 7%. Analysts believe that even as both growth and asset quality come under pressure in the June quarter, profitability metrics may remain stable. “While we believe near term asset quality concern do persists, its precautionary measures in Q4FY21, strong capital position with CAR (capital adequacy ratio) at 27% and adequate liquidity (16.5% of total assets) will ensure return on assets reviving to 3.4% by FY23,” wrote those at ICICI Securities Ltd in a note.

Including Madura, the company’s gross loan portfolio is now Rs13,587 crore, with 39.12 lakh active borrowers. While AUM growth was healthy, accretion of new customers was tepid. Further, the average loan ticket size increased sharply, indicating increased indebtedness of the borrower. This does not augur well for asset quality, given the pandemic. Increased indebtedness puts pressure on an already stressed borrower and repayment capacity gets impacted adversely. It is clear that stress would increase but the management is hopeful that the second wave may not impact in a large way. To be sure, the June quarter is likely to see pressure on both growth and asset quality considering that most states have imposed strict restrictions on mobility. Even so, the pain this time around would be less compared with 2020, according to the company.

Nevertheless, CreditAccess Grameen has left nothing to chance. The lender has included its restructured loans in stage three assets or delinquencies for the purpose of provisioning. Including restructured loans, the lender’s gross bad loans formed 4.38% of the total book. It is this caution that has given investors comfort. To be sure, shares of the company have declined 1.6% in the past one month in a reflection of concerns due to the pandemic’s second wave. From here on, the lender needs to show recovery again to regain favour among investors.