Microfinance sector in India: ICRA

•  According to an estimate by the ICRA, the country’s microfinance sector will grow nearly three-fold to reach up to Rs 4.3 trillion over the next three years on account of expansion into newer segments and enhanced average loan sizes.
• Indian microfinance institution (MFI) sector grew 40 per cent in 2015-16 to Rs 1.4 trillion (including the Bandhan Bank) as against a 38 per cent growth in the previous fiscal, while the average ticket sizes were Rs 20-25,000.
• The MFI loan growth was on the back of a 72 per cent growth in the portfolio of MFIs, small finance bank licensees and banks, adding the SHG bank linkage credit grew only 11 per cent.
• The MFI sector, excluding Bandhan Bank and teh SFBs, will need external capital of Rs 16-47 billion over the next three to four years

Analysis:

• The Indian microfinance sector is currently evolving. While on one hand, Bandhan became a scheduled commercial bank in FY2016, on the other, seven NBFC–MFIs and one Core Investment Company (which has an NBFC-MFI subsidiary) are slated to transform into SFBs(Small Finance Bank) by March 2017.
• There has also been an increase in new entrants with various banks — especially private sector banks — starting to lend directly in the microfinance segment as well as through Business Correspondents, thus fuelling further competition.
• While the business opportunity is exciting, there is a need for establishing a credit culture in the new geographies and strengthening the credit appraisal processes.
• Some pressure on asset quality was witnessed in FY2016 due to communal and political issues in certain pockets of Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand and Karnataka, while other States were impacted by environmental issues like drought and floods. However, timely action by MFIs, with support from self-regulatory organisations (SROs) and government bodies, helped arrest delinquencies in most cases.
• Two operational credit bureaus have helped the sector maintain its asset quality, there are a few issues yet to be addressed like limited coverage of SHG bank linkage programme data, issues related to multiple identity cards being used by borrowers for availing loans from more than two MFIs and interlinking of retail credit.
• The segment remains vulnerable to asset quality shocks owing to risks associated with unsecured lending business, political risks, and operational risks arising out of cash handling.
• Client penetration levels of MFIs vary across States, with mature markets, such as Karnataka, Tamil Nadu, and West Bengal having high penetration levels and a number of large states, such as Uttar Pradesh, Bihar, Jharkhand, and Chhattisgarh still being under-penetrated.
• With established markets getting saturated, going forward the MFIs will seek to improve penetration in new geographies, to support growth along with offering higher loan sizes to existing borrowers.

By: Vishal