Demonetisation: Capital First's GNPA can go up to 1.2% in Q3: Executive Chief

With the pullback in November the company's gross non-performing assets (GNPA) can increase to 1.2 percent in the third quarter against 1 percent in the second.

In the same interview Digant Haria, AVP Research, Antique Stock Broking said that demonetisation completely broke the momentum of NBFC's and has put a break on loan growth, operating leverage and asset quality.

He further said that six months down the line, there will be a significant reduction in terms of fringed lenders in the microfinance institutions (MFI) sector.Below is the verbatim transcript of V Vaidyanathan and Digant Haria's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What has been the experience after 40 days of demonetisation, are you seeing a fall back in repayments at all?

Vaidyanathan: In the first two weeks of a demonetisation we saw that to the extent that there was cash collection because in our portfolio close to about 95 percent is by cheque and 5 percent is by cash. But that 5 percent cash was down 50 percent as compared to the same period the previous month. In the next week, the shortfall came down to 40 percent and in the next week it came down to 30 percent and as we speak right now, it is almost back to normal. So I think that things are turning fast, the public is returning to normal faster than we initially expected it to be.

Sonia: The AUM growth that you saw in Q2 was very strong especially in the two-wheeler segment, it was almost about 60 percent growth over there but given that we have seen the two-wheeler companies get impacted quite a bit by the cash crunch, do you think that there will be a slowdown in your AUM growth in the second half of the year?

Vaidyanathan: In the two-wheeler market about 70 percent of business is done by the dealers, was being sold in cash. So to that extent the sale numbers have definitely got affected. In terms of disbursals, in the month of November they were down close to about 40 percent. This month, it is going to be down by about 15 percent and by January things will come back to normal. So basically this whole demonetisation thing is turning out to be a one quarter phenomenon and by January, February and March, both collections and disbursals -- the collections will be fully back to normal next quarter and disbursals will be down -- comparative to the expectation -- 10-15 percent and in the April, May and June quarter, things will be entirely back to normal.

Latha: Do you notice any pain in some of your SME or MSME borrowers?

Vaidyanathan: There were pains in terms of liquidity versus significant issue, which is why I told you that the cash collections were down 50 percent and that is not a small amount.

As I said, things are returning back to normal on that front. It is basically not a solvency issue, we still believe it is not a significant solvency issue. We are seeing it in all informal conversations that people down the line, shopkeepers -- initially people said businesses are down 40-50 percent for the first two weeks. But when you talk to most of the vegetable vendours, they are saying businesses are back to normal. So we think that this situation is resolving.

Sonia: Can you quantify that for us? Your gross non-performing assets (NPAs) as of the last quarter Q2 still are at comfortable level of around 1 percent, do you see any worsening of that in Q3 and Q4?

Vaidyanathan: Yes, we think that our gross NPA was about one percent. Because of the November effect I talked to you about, we would expect it to be 1.2 percent or so. It is a guess for and maybe net will probably be around 70ish-75ish rate. So basically it is in that order of magnitude where it is very manageable and very comfortable.

Latha: So Rs 175 crore of gross NPLs when you last reported can go to Rs 250 crore you think?

Vaidyanathan: No, as I told you. Let me talk percentages because that is more comfortable for me. Gross was one percent, we expect it to be about 1.2 percent at the end of this quarter. But it is marginal and nothing that is worrisome.

Sonia: Do you see a concomitant impact also on your margins, last quarter the margins were at an all time high of 9.2 percent? In Q3, Q4 what could the near-term impact be?

Vaidyanathan: Margins will continue to hold good. It will improve by about 20 basis points. More because of the fact that cost of funds is coming down much sharper than expected. Now, money is available in the MCD market for two-three year at anywhere about 8-8.2 percent. That is amazing the way the things have dropped.

Latha: First a quick question on NBFC, would you worry or is that sector fallen enough for you to become attractive?

Haria: NBFCs is a mix of six sub sectors and we have to understand that demonetisation is an event, which completely broke the momentum. The sector was in perfect momentum and that momentum has been broken for now be it the cash crunch, be it the difficulties which day-to-day businesses are facing. So that momentum is surely broken.

Financial is a sector, where if growth is good, operating levels also comes in and asset quality is also good. So for now you have brakes on all of these three like one engine stops, the other two engines automatically stops. So that has happened and the sector has corrected along with that but I think it it is the time when the men and boys gets separated. You had 50 MFI companies which came from nowhere and started lending in the last three years. You had like 20 companies coming in the affordable housing space. So I think now six months later, you will see that a lot of these guys may probably vanish or not be there but the sector leaders, the guys who have done a good job in giving good customer service at affordable rates, those are the ones, which needs to be cherry-picked and need to be kept in the portfolios.

Sonia: Bharat Financial Inclusion seems to be quite confident that they will get out of this probe, what is the sense you are getting about how investors should approach the stock after the 20 percent fall?

Haria: Microfinance -- we need to separate the sentiment and the reality. The microfinance business model has been built out of a genuine need of the bottom of the pyramid and Bharat Financial has been at the forefront of doing that. So with whatever controversies that are there surrounding Uttar Pradesh (UP), political interference, Maharasthtra, I would like to point out one fact that if you take out UP and Maharashtra where there is an external interference by the government, Bharat Financial has collection efficiencies of 95 percent for the last 40 days. There is demonetisation, there are customers, there are borrowers who are busy switching notes and standing in the bank queues and they still manage to pay 95 percent of what they owed to the company.

Here I separate one big thing that the intent of the normal borrower to repay has not been broken. So that is a very big thing on which MFIs rests.

About the Maharashtra and the UP political interference, they will end once the election periods in both these states end because these are now regulated by the RBI, they come under the Central government and the state governments cannot interfere. So during the Andhra Pradesh time, they were not regulated and state could apply the money lenders act on them. That is no more the case.

So it is a matter of time that these things will be resolved by the state and the RBI and Bharat Financial has one of the best processes and best customer services. So at a point in time, it is definitely a buy for us maybe the sentiment is negative, you may get the stock Rs 20-50 lower, who am I to say but if it is a business model, which we think will survive this crisis and will emerge much stronger.

Latha: Which are the others -- Ujjivan Financial Services, Equitas Holdings?

Haria: Ujjivan, Equitas both are small finance banks. So the ballgame for them changes a little bit. They can accept old notes maybe open customer accounts but we are a house, we are more positive on Equitas because they are also very conservative or very customer friendly in our nature and they have zero exposure to these states of UP. Some 6 percent of their overall loan book is in Maharashtra. So they can easily manage, they had reported 98 percent collection efficiency. So I think these are fantastic things which these guys are doing.