Growth at 25-30% in the current fiscal: ICRA




Players in the Indian microfinance sector would need external capital of Rs.3,900-5,300 crore during over the next three years, according to ICRA estimates.

The domestic sector registered a robust growth of 36% during the 12 months ended September 2019 against 30% in FY2019 and has emerged unscathed even as the liquidity squeeze, post September 2018, severely curtailed the growth of NBFCs in India, said ICRA on 13 Jan 2020.

Consequently, the overall microloan market size (including the SHG Bank Linkage Programme) was reported at Rs.2.9 lakh crore as of September 2019. The robust sectoral growth was driven by the good growth of banks, small finance banks (SFBs) and larger NBFC-MFIs that were relatively well placed on the liquidity front.

Commenting on the sectoral updates, Supreeta Nijjar, Vice President and Sector Head, Financial Sector Ratings, ICRA Limited said, “While the sectoral growth and asset quality have been good, there has been a rise in the share of loans at higher ticket sizes and individual loans.

“Based on portfolio cuts analysed for around 30 MFIs and SFBs, the share of loans with ticket sizes of >Rs.48,000 increased to 28% as on 30 September 2019 from 12% as on 31 December 2018.

“If a factor is applied here, assuming 30-40% of these borrowers had multiple loans, around 8-11% of the portfolio could be at an overall leverage of Rs.1 lakh or more.

“Additionally, the proportion of the portfolio in the first loan cycle remains high at 49% as on 30 September 2019, which indicates low client retention rates.

“Discussions with various MFIs/SFBs show that client attrition rates have gone up with the increase in competition, especially in overcrowded districts. This leads to pressure on the field staff to continuously acquire clients and penetrate newer geographies for maintaining the client growth rates.”

In November 2019, the Reserve Bank of India (RBI) increased the maximum allowed indebtedness of a borrower to Rs.1.25 lakh from Rs.1 lakh earlier for NBFC-MFIs. With this change, the ticket sizes are expected to grow at an even faster pace.

While this may help MFIs reduce operating costs and enhance client retention to some extent, microlenders such as banks and SFBs are also serving the same customers and are not covered by these guidelines.

Therefore, the overleveraging risk has increased and would need to be addressed through a comprehensive assessment of the debt-servicing ability of the borrowers and more evolved risk management practices on the part of the lenders.

The asset quality of NBFC-MFIs (including SFBs) remained similar to March 2019 levels with the 90+dpd delinquencies at 1.6% as on 30 September 2019 (1.5% as on March 31, 2019), driven by good collection efficiencies and portfolio growth.

It is pertinent to note that around 1.50% of the portfolio remained in the 0-90 dpd bucket over the last one year owing to an increase in delinquencies in areas affected by the floods and cyclones in Kerala, Tamil Nadu and Odisha.

Also, ICRA is of the view that the recent protests by local organisations against microlenders and reports of unrest in various districts of Assam may weaken the asset quality of the major players operating in the state.

ICRA conducted field visits in 12 states in CY2019 and its analysts interacted with more than 3,000 borrowers. Some of the key observations are low to moderate centre meeting attendance in some states, under-reporting of indebtedness by borrowers, and presence of more than two loans outstanding in the case of some members.

Banks have been the key debt capital providers for the sector largely because of the continuation of priority sector status for NBFC-MFIs.

While the overall debt raised by the MFIs was lower than envisaged owing to the liquidity squeeze, the mid-to-large-sized MFIs were better placed and continued to get funding support from banks.

However, the smaller MFIs, which had higher dependence on NBFCs for meeting their funding requirements, faced some constraints in meeting their business plans. As a result, they raised higher volumes of funds through the securitisation route and further enhanced their business correspondent (BC) relationships.

The MFIs have been able to maintain a favourable asset liability maturity profile, given the relatively short tenure of the advances. Additionally, the liquidity profile is supported by the priority sector benefit that the banks get for funding these entities, either through the on-balance sheet route or the off-balance sheet (largely assignment of microloans) route.

Investors continued to support the industry with equity infusions of around Rs.5,400 crore in FY2019 (~Rs.3,100 crore in FY2018) and Rs.1,200 crore in YTD FY2020. However, more than 90% of the capital raised in FY2019 was by MFIs with AUMs exceeding Rs.1,000 crore, inferring that raising capital has been easy for MFIs that have reached a certain scale while the smaller entities continue to struggle to raise equity.

Given their growth targets of 25-30% p.a. over the next three years, in ICRA’s opinion, these players would need external capital of Rs.3,900-5,300 crore during this period. There could also be a change in the business model of the smaller MFIs, which may originate more portfolio through the BC model, as partners to larger lenders, to conserve capital. Alternatively, there could be further consolidation in the industry with the smaller MFIs being acquired by larger NBFCs/banks.

“While the growth prospects remain good and the industry is expected to grow by 25-30% in FY2020, MFIs need to conduct a more involved and thorough credit analysis/assessment of the actual debt repayment capacity of the borrower,” said Nijjar.

Further, the risk management policies of the lenders in the sector need to be aligned to ensure responsible and sustainable growth. On the positive side, the asset quality indicators should be supported by ensuring stringent group selection/elimination norms and adequate credit discipline at the borrower level by enforcing joint group liability, wherever applicable and required.

Nevertheless, the sector shall always remain vulnerable to income shocks, political interference, and event risks, added Nijjar.

Accordingly, ICRA expects the credit costs for the sector to remain volatile with a mean level of 1.5-2.0% (annualised). The credit cost could vary among players and across cycles depending on the risk management practices and exposure to relatively overcrowded areas.

The sector is expected to report a return on equity (RoE) of 13-15% in FY2020, said ICRA.


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