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Signs of Revival Turn Lender Bullish on India's Villages

Updated on
  • M&M Financial sees business growing, bad loans dropping
  • ‘We have a bullish forecast for the agrarian economy’

The recovery in India’s rural economy is likely to curb bad loans and boost profit at financial companies that specialize in credit to the country’s villages, according to one of the biggest such lenders.

Mahindra & Mahindra Financial Services Ltd., which offers loans for equipment and vehicles in 330,000 of India’s roughly 600,000 villages, is seeing business growing and bad loans dropping since the middle of 2017. That’s because the crucial monsoon rainfall was normal last year and the negative effects of the government’s shock decision to invalidate high-value currency notes is fading as authorities step up spending on roads and healthcare across the hinterland, said M&M Financial Managing Director Ramesh Iyer.

“We have a bullish forecast for the agrarian economy,” Iyer said in an interview at the company’s headquarters in Mumbai, adding that delinquent customers are now resuming loan repayments. “The twin cash flow -- income from farm produce and government’s infra spend -- is leading to an improvement in rural sentiment.”

Bad Loans Fall

Gross non-performing loans are declining at Indian non-bank financial companies

Source: Data compiled by Kotak Institutional Equities

India had been ravaged by insufficient rainfall since 2015 and Prime Minister Narendra Modi’s cash ban the following year caused crop prices to crash, triggering a wave of farmer protests across India. That pushed authorities to shift policy from keeping food costs low for consumers to offering farmers higher prices for their produce, and last week the government of Maharashtra state -- epicenter of the agrarian crisis -- agreed to consider forgiving the debt of more farmers.

Read: Indian Farmers Call Off Protest After State Bows to Demands

More money in the hands of farmers stands to boost demand for tractors and trucks, benefiting companies like M&M Financial. However, such waivers do little to improve a farmers’ creditworthiness -- which depends more on the outlook of the harvest, Iyer said.

The market for agricultural credit in India is dominated by state-run banks, which are used as policy tools given that the bulk of India’s population depends on agriculture for their livelihood. However, government-controlled lenders have been hit by the souring of the credit they extended to industrial companies, which has curbed new loans. This has allowed non-bank financial companies to grab a bigger market share, with M&M Financial and its peers accounting for about 21 percent of loans in the year to March 2017.

Gaining Prominence

Non-banks and housing finance companies are increasing their share in total lending

Source: India Ratings

* Refers to year through March 31

M&M Financial last quarter reported its strongest growth in profits since at least 2010 due to recoveries in non-performing loans, and management expects lower fresh delinquencies going forward, analysts at Emkay Global said in January. The brokerage upgraded its rating on the company to hold with a target price of 520 rupees. M&M Financial shares fell 1.5 percent to 427.15 rupees as of 12:34 p.m. in Mumbai on Monday, paring the past year’s gain to about 36 percent.

Read: Bloomberg Economics tracks India’s rural economy

“Going by demand for farm equipment, commercial vehicles and construction equipment, rural demand is outpacing urban after about three years," Iyer said. “In the last three quarters, there has been a change for good.”

— With assistance by P R Sanjai, and Karthikeyan Sundaram

(Updates with shares in penultimate paragraph.)
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