Goldman Sachs sees 42% downside potential on CreditAccess Grameen amid asset quality concerns

Over the past year, shares of CreditAccess Grameen have nosedived over 40 percent on the bourses.

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International brokerage Goldman Sachs slashed its rating on microfinance player CreditAccess Grameen Ltd., as the earnings outlook remains clouded. Shares of the non-banking financial player tumbled over six percent on November 29.

The brokerage downgraded the NBFC's rating to 'sell', from its earlier 'buy' tag. The revised target price is Rs 564, down from Rs 1,426 per share earlier. This indicates a 42 percent downside from the previous session's close.

According to the broking house, the earnings visibility for CreditAccess Grameen is murky since the asset quality remains a concern. Therefore, the de-rating is structural in nature.

The brokerage expects a further build-up of stress due to over- leveraging in the industry and in the company's portfolio. It added that the accelerating decline in asset quality seen in the quarter gone by was a negative surprise. The asset quality will likely continue to decline, with the new guardrails put in place this week.

Goldman Sachs sees lower return ratios for the company, which will be driven by higher competitive intensity and regulatory actions. Further, the lower growth potential given high penetration levels in some states will also weight on CreditAccess.

At 9.30 am, shares of the firm were quoting Rs 920.1 on the NSE, lower by 6.71 percent.

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Earlier last week, the Microfinance Institutions Network (MFIN), a self-regulatory body for the microfinance sector, plans to enforce stricter guidelines to address the current asset quality challenges faced by its members.

The updated rules aim to curb excessive borrowing among low-income borrowers and limit the credit provided to them, a key factor in the sector's ongoing crisis.

MFIN has advised members to halt loans to borrowers with overdues exceeding 60 days and amounts above Rs 3,000. This tightens the existing standard, which restricted lending to those with overdues of 90 days or more. Loans overdue beyond 90 days are classified as non-performing.

Over the past year, shares of CreditAccess Grameen have nosedived over 40 percent on the bourses. In comparison, the benchmark index Nifty 50 has risen around 22 percent during the same time.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.