Dear Investors,
The following chart depicts our returns viz BSE 500 TRI:
In this monthly memo, we try to stitch together the reasons for the current stress in the micro loans market in India. The attached deck summarizes our top down assessment of the sector.
Summary: Liberal regulatory policy post COVID has created adverse incentives for the sector where the AUM growth is 2-3x the growth in the customer base. VC/PE funded Micro-Fins have further added fuel to the fire. The Industry currently has a sizable customer base which has 4 plus individual loans and 5 plus household loans. The players we have spoken with blame the RBI for the clampdown in the last 3 months. Needless to say, when you don't discipline, you need a regulator to intervene. Stress in the Micro-Fin sector is expected to compound in Q3 FY 25. This will be the moment to test the lending quality of best and worst in class lenders. This is also expected to have an impact on rural/low income household demand which was coming out of COVID and demonetization.
We have initiated buying a high quality Micro-Finance company (down by ~ 50% from its peak) in your portfolio and will build the position over the next 3-6 months.
Please feel free to reach out to us if you have any queries.
Regards,
Prescient Capital