ICRA: MFI sector back on growth track, but new challenges on the horizon
·
Industry expected to post
around 20-22% growth
·
Challenges pertaining to
high client attrition and fresh capital infusion to fund growth remain
The
Indian microfinance sector (including the SHG Bank Linkage Programme) grew 25%
(annualised) in Q1 FY2019 to Rs. 2.25 lakh crore. The growth was supported by
good collection efficiency, continued investor support to microfinance
institutions (MFIs), funding availability and demand for microcredit.
Commenting on this Ms. Supreeta Nijjar,
Vice President and Sector Head, Financial Sector Ratings, ICRA says, “The
Growth prospects remain good and the industry is expected to grow at 20-22%.
The industry has diversified geographically at the state as well as the
district level. While Karnataka and Tamil Nadu remained the top two states in
terms of portfolio share, with the increased focus of industry participants on
expanding their reach in the underpenetrated states of Bihar and Odisha, where
the asset quality indicators remained benign even after demonetisation, the
share of these two states put together increased from 13% to 18% as on June
2018. Even at the district level, the share of the top 20 districts declined to
around 18% of the portfolio outstanding as on June 30, 2018 from 25% in
September 2016.”
Including
the SHG Bank Linkage Programme, banks were the most significant providers of
microcredit (60%) as on June 30, 2018, followed by Non-Banking Finance
Companies(NBFC-MFIs) at 26% and Small Finance Banks(SFBs) at 14%. ICRA expects
the share of banks to expand with the expected merger of Bharat Financial
Inclusion Limited and IndusInd Bank Limited, and the increased focus of banks
on growing their business correspondent (BC) portfolios. ICRA has also noticed
the trend of banks/larger NBFCs taking partial/majority stakes in MFIs. In some
cases, MFIs are also working on increasing lending through the BC model and
developing co-lending arrangements, which are likely to be more efficient from
a credit risk and capital management perspective.
On the
flip side, high client and employee attrition could lead to scalability
challenges for the sector. Employee attrition continues to be around 25-30% at
the field level. This coupled with 25-30% expansion in the field staff every
year to support branch expansion, would imply that around 50% of the staff, at
any point in time, would have a vintage of less than a year in a particular
MFI. This implies continuous need for staff training and development. Further,
the training needs are likely to change as the lenders move towards higher
automation of processes and higher ticket sizes. Client attrition rates have
also increased with an increase in competition. This also leads to pressure on
the field staff to continuously acquire clients and explore newer areas for maintaining
the client growth rates.
The ICRA
note says that the overall 0+ dpd for the sector reduced to 8% in June 2018
from a peak of 23.6% in February 2017. Harder bucket delinquencies reduced as
well with the 90+ dpd declining to 7.3% in June 2018 from 12.2% in June 2017,
supported by increased portfolio growth, write-offs and arrear funding by some
lenders. However, excluding one large player whose delinquencies were
significantly higher than that of the industry, the 90+ delinquencies for the
rest were significantly lower at 2.9% as of June 2018 (peak of 8.1% as of June
2017). Uttar Pradesh, Maharashtra, Gujarat, and Uttarakhand, which had high
delinquencies as of June 2017, showed a reduction in delinquency levels across
all buckets.
An
analysis of the portfolio cuts of MFIs reveals that the ticket sizes and loan
tenures are rising. While the opportunity to scale up and grow remains intact,
there is need for a more involved credit analysis and assessment of the actual
debt repayment capacity of the borrower. Further, the risk management policies
of the lenders in the sector need to be aligned with responsible and
sustainable growth, where the overall indebtedness of the borrower from all
formal sources is considered for leverage calculations rather than for
compliance with regulatory norms. The asset quality indicators should be
supported, over the medium term, by structural factors such as group
selection/elimination and the fact that MFIs represent the least cost of
funding for borrowers. Nevertheless, the segment remains vulnerable to income
shocks and is politically sensitive. Therefore, ICRA expects credit costs for
the sector to remain volatile with mean credit costs at 1.5-2.5%, which could
vary among players across cycles, depending on their risk management practices.
While
investors continued to support the industry with equity infusion of Rs. 4,061
crore in FY2018 (~Rs. 6,570 crore in FY2017), 87% of the capital was infused in
the top 10 lenders in terms of portfolio size. “In ICRA’s opinion, the sector
would need external capital of Rs. 6,000-9,000 crore till FY2021 to meet the
growth plans. While raising capital is unlikely to be a major impediment for
well-managed large MFIs/SFBs, the smaller entities may continue to struggle to
raise equity. This could result in an increase in the share of smaller MFIs
originating 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,” Ms. Nijjar added.
In
addition to the capital flow which aided the liquidity profile of MFIs in the
past, their liquidity profile is also supported by the priority sector status
attached to the bank loans and off-balance sheet funding (largely assignments)
of MFIs and relatively shorter tenures of their assets vis-a-vis
liabilities. However, incremental funding requirements for the MFIs are
likely to remain high given the growth aspirations and the need to maintain disbursement
levels for servicing the existing client requirements as well. At the same
time, the recent volatility in the wholesale market is likely to keep the cost
of funds elevated for these MFIs especially since these players are highly
dependent on wholesale funding sources. Overall, availability of fresh funding
would be a key factor impacting MFIs’ liquidity profiles going forward.
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