The limits on Savings Bank accounts will continue, but more importantly for microfinance lenders, the limits for cash withdrawals from current accounts / cash credit accounts/overdraft accounts (hitherto Rs 100,000 per week, per account) have been withdrawn.
While trends in collection efficiency will be the key, as that will determine MFIs’ willingness to take additional risk in select centers/ geographies, this relaxation could improve the ability of MFIs to grow their portfolios in centers where collection efficiency has normalised or is near normal. BHAFIN is a pure play on the microfinance space with a robust model. Valuation at 3.2x one-year forward book value is around the long-term mean, and should be seen in the context of strong book value compounding (20%+ ROE).
We value the business over three phases – a five-year high-growth period,a 10-year maturity period,and a terminal period. We assume a terminal growth rate of 6%, similar to that for other financials.
Much higher than expected NPLs following demonetisation; issues specific to any other MFI which hurt BHAF’s valuation temporarily; adverse regulation that could impair growth or profitability.