Is microfinance a bubble?
Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how. We do this show in both formats: video and audio. This piece curates the stories that we talk about.
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Today, we look at 3 big stories:
Inflation in India and the US is a tale of two cities
Is there a microfinance bubble brewing?
TCS’s results and what it means for the Indian It sector.
Inflation in India and the US is a tale of two cities
We discussed Jerome Powell's optimistic remarks about a potential rate cut in the US. The latest US inflation data has now been released, and it brings good news. The US consumer price index (CPI) fell to 3% last month, the lowest since April 2021. Although core inflation, excluding food and energy, saw a slight increase, it was the smallest rise since August 2021.
This favorable data increases the probability of a rate cut in September to 95%.
Back in India, RBI Governor Mr. Shaktikanta Das shared insights in an interview with CNBC TV18, discussing the current inflation scenario and economic growth prospects.
Key Points from the US:
The US consumer price index fell to 3%, the lowest since April 2021.
Core inflation rose slightly, marking the smallest increase since August 2021.
The likelihood of a US rate cut in September is now at 95%.
Key Points from India:
The last inflation print was 4.7%, and June inflation is expected to be around 5%, according to surveys.
RBI Governor Das believes it's premature to discuss interest rate cuts with inflation still above the 4% target.
The momentum of economic activity remains strong, with a 7.2% growth forecast looking achievable.
RBI will base policy decisions on observable metrics rather than theoretical constructs.
India’s structural growth drivers are strong, aiming for an 8% growth trajectory.
The RBI is not overly worried about stock market investments affecting the broader economy but is monitoring potential spillovers.
No major concerns about people borrowing to invest in the stock market.
Upcoming Data and Predictions:
June inflation data will be released soon, with a Reuters poll predicting a rise to 4.8% from 4.75% in May, driven by increased vegetable prices due to heatwaves.
Indian food inflation has remained above 8% throughout 2024.
After a slow start, the Indian monsoons are picking up pace, with heavy rains spreading across the country.
Is there a microfinance bubble brewing?
Indian credit growth has surged post-pandemic, with overall credit growing at around 20% year-over-year, and microfinance growing even faster at 25%. While this rapid growth has fueled economic activity, it has also raised concerns at the Reserve Bank of India (RBI), which has started to take steps to manage the risks associated with high credit growth. Recently, reports suggest that the RBI is particularly concerned about the high growth of microfinance loans in states like Bihar and Uttar Pradesh.
Key Points:
Microfinance industry growing at 25% year-over-year, with Bihar and UP experiencing 30-40% growth, the highest in India.
RBI has already made it costlier for banks to issue unsecured personal loans and is now reportedly advising MFIs to slow down in high-growth states like Bihar and UP.
Microfinance institutions provide small loans and financial services to underserved, low-income individuals, crucial in a credit-starved country like India.
The MicroFinance Institutions Network (MFIN) has implemented policies to limit borrowing: capping total borrowing at Rs 2 lakh per borrower and restricting borrowers to a maximum of four lenders.
Nationally, 7% of borrowers have loans from four or more lenders, with Bihar and UP at 9% and 7%, respectively.
Rapid loan growth can lead to over-borrowing by low-income individuals, increasing the risk of defaults, which can adversely affect both borrowers and lenders.
Some banks and NBFCs like Utkarsh Small Finance Bank, Satin Credit Care, and IIFL Samasta have significant exposure to these high-growth states.
Despite the growth, bad loans are currently under control, with no major spikes anticipated despite challenges like elections, heatwaves, and rural distress.
High exposure in states like Bihar and UP could have widespread effects if the situation worsens, impacting not just specific institutions but the broader financial system.
TCS’s results and what it means for the Indian It sector.
TCS, the largest IT services provider in India, reported its quarterly results last week, showing a 5.4% year-over-year revenue increase and an 8.7% rise in net profits. These results suggest that the IT sector, which has struggled over the last couple of years, may finally be seeing the worst behind it.
Key Highlights:
TCS reported a 5.4% increase in revenue and an 8.7% rise in net profits year-over-year.
As the largest IT services provider, TCS's results are indicative of the overall sector's performance.
CEO K. Krithivasan highlighted the intertwined growth of BFSI (Banking, Financial Services, and Insurance) and North America, emphasizing that improvements in BFSI will boost North America’s performance.
Despite wage increments impacting EBIT margins slightly, TCS maintained robust margins. CFO Samir Seksaria attributed this to better productivity, improved utilization, and reduced subcontractor costs.
TCS noted increased client interest in AI solutions and significant investments in AI. However, most AI projects are currently experimental, with the potential to drive future revenue.
According to Nomura Research, the broader Indian IT services sector is expected to see the lowest revenue growth in Q1 FY2025, with recovery anticipated by FY2026. Factors like interest rate cuts in the latter half of 2024 and post-US election decision-making are expected to boost demand. Generative AI adoption over the next 12-18 months should further drive growth.