Shares of non-banking finance companies (NBFCs) crashed further after it was reported that the Maharashtra government will form a special investigation team (SIT) in order to investigate violations of norms by microfinance companies.
During the last 10 trading sessions, Bharat Financial Inclusion Ltd gained only on one day, Shriram Transport Finance Co. Ltd, Repco Home Finance Ltd, GIC Housing Finance Ltd gained in two sessions, while Shriram City Union Finance Ltd, Bajaj Finance Ltd, L&T Finance Holdings Ltd, Mahindra & Mahindra Financial Services Ltd, Equitas Holdings Ltd and Ujjivan Financial Services Ltd increased in three sessions.
The government formed the SIT after legislators and farm activists hinted that serious irregularities, like disbursement of loans to more number of people than allowed and steep interest rates.
On account of political risks that are playing out in certain areas, one cannot ignore the possibility of some write-offs. However, the current phase is transient in nature and the strong players will endure some collateral damage. A big positive that can emerge out of the current situation is that the indiscipline caused by fringe MFIs could be curbed.
Also, the sentiment of investors was hurted as they expect that the cash crunch will generate lower profitability of these companies on falling disbursements and likely rise in credit costs. On 8th November, Prime Minister Narendra Modi announced scrapping of Rs500 and Rs1,000 notes as legal tender in order to cure the country of black money.
The demonetization related cash crunch has had a direct impact on the cash intensive operations of microfinance companies in the form of a fall in fresh disbursements and loan collection.
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Also, rumors of loan waivers and associated political instigation to default are raising risks of mass defaults in certain geographies. The situation is unlikely to improve soon and it anticipates bank transactions to become more painful for the coming 18-24 months.