While there are challenges in its microfinance portfolio, he said the bank has taken proactive steps to diversify its assets. With a focus on secured lending, including a growing gold loan and agri book, ESAF is strategically reducing its reliance on microfinance.
This is the verbatim transcript of the interview.
Q: First up the business sentiment for players like yourself appears to be quite subdued at this point of time, appears to be significant amount of pain as far as the MFI space is concerned. Now when we look at your Q2 (July-September) numbers, significant deterioration as far as asset quality is concerned in the last six years, amongst all of the lenders that you actually compared it to, what is causing so much pain and was it something that was not identified earlier?
A: You are right, this is one significant asset quality issues we are facing in our journey of last seven years. There are multiple reasons we have been facing this stress in few of our major geographies, specifically in the west coast, where we have we working with fishermen, in Kerala and Tamil Nadu. Since COVID, we have been facing this stress, and specifically in Kerala market after the 2018 flood, also the rural stress we have been facing.
But suddenly it is boomed with various other reasons, one is that the over-indebtedness issues. So after in 22 so there are no many new players came in, and people were having lot of money available. So there are real over-indebtedness has started coming, and there are regulated entities and non-regulated entities operating in this space. So that is one major challenge which we have faced.
The other issues are very high attrition among the field staff of our business correspondent partners was also contributed, because this is a very high touch business model. So when the staff leaves, we lose the customer connect. So that also impacted.
The third issue we have faced is that after the COVID, because microfinance operates more on mutual guarantee, joint liability group (JLG), and that’s how microfinance has evolved in India. So after the COVID, the importance of meetings got affected and technically there was no meeting. So that affected.
Q: Talking specifically about repayments. Aviom has an overdue to you. You are one of their bankers. What is the current status because we have news that they have pushed down their repayment to their lenders?
A: Yes, we have an exposure with the Aviom. Our leadership team is in constant touch with the management of Aviom, and also, we have taken steps to connect with the board and the leadership, and they promise that they are bringing additional equity and they will be able to service. So that is the latest update on this.
Q: So has the loan repayment timeline been pushed on for a few quarters?
A: No, at the moment, we are also interacting with the other lenders. I think the company is calling a lenders meeting early in the first week of December. So maybe collectively, the lenders together will take a call on that.
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Q: What is the repayment from your end to your lenders? Because some of your lenders are saying that there are some hiccups in the repayments and they are unable to connect with you. With respect to what is the repayment status? Any outlook due to the stress in the microfinance sector that we are seeing, are you also facing difficulties with respect to repayment to your lenders?
A: No, we don’t have any issue. We have a very sufficient liquidity position. Our LCR is 130%, so we don’t have any issues. Our asset quality issues is only on the microfinance portfolio, which now we have already taken steps to diversify our assets, to secure book. Our secured disbursement, year-on-year basis, has grown to 92% and our gold loan book is growing at 59%. Our agri book is growing at 20%, MSME and mortgage book is also growing.
We brought down our micro finance from 72% to 62%, and we are also planning to bring it down further. By financial year 2026 it will be brought down to 40%. Our original plan was to keep it at 60% of by 2027 but we have strategically taken a decision to increase our secured book.
Also geographical concentration on South also, we have taken steps to bring down our Kerala concentration. Also we have taken over a major business correspondent operations in July. Now today, 50% of the micro finance book is managed by bank directly, so we are able to manage the attrition also that side.
Q: What is the second half outlook looking like in terms of your loan growth, the net interest margins, and also in terms of slippages in credit cost can you give us some numbers there?
A: Credit cost will continue to be the same level for the first half.
Q: The other numbers, net interest margins and the outlook on the other numbers as well?
A: Net interest margin at September, it is 8.6%, so we it will be flat for the next two quarters.
The company, which has a market capitalisation of ₹2,066 crore, has seen its shares declined 41% over the last year.
Also Read | Asset quality will improve over the next two quarters, says ESAF Small Finance CEO
