The Indian Microfinance sector reported an overall growth of 40% in FY2016 (38% in FY2015) with the market size nearing Rs. 1.4 trillion (including Bandhan Bank) as on March 31, 2016. This growth was driven by an impressive ~72% growth in portfolio of MFIs, SFB licensees and banks, while the SHG bank linkage programme grew at only 11% in FY2016. The growth was supported by new entrants, increase in client outreach and higher ticket sizes as well as continued fund flow to the sector.
Chart 1: Trends in size and growth of the MFI market
Source: Basic Statistical Returns (RBI), Status of Microfinance in India (NABARD), Financials of various MFIs, MFIN Micrometer, ICRA estimates and analysis
With increased client outreach, the penetration levels[1] (clients served as a proportion of target segment) stood at 50%-55% by end FY2016. However, client penetration levels 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 remain underpenetrated. Mr. Kalpesh Gada, Senior Vice President said “With established markets getting saturated, going forward, MFIs would seek to improve penetration in new geographies to support growth along with offering higher loan sizes to existing borrowers (present ticket sizes are around Rs. 20,000-25,000). In ICRA’s opinion, if the ticket sizes were to double from the current levels (on account of improving income levels, inflation, higher eligibility of borrowers moving to higher loan cycles) over the next 3-4 years and MFIs were to increase their presence in underpenetrated areas, the microfinance market (across SHGs, MFIs, banks) could reach Rs. 3.3 – 4.3 trillion over the next three to four years”. While scope for growth remains good, establishing a credit culture in the new geographies, strengthening the credit appraisal processes, focusing on employee training and retention are likely to remain the critical performance determining factors for sustainable growth.
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 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 two operational credit bureaus have been key enablers for maintaining asset quality in the sector, certain issues such as 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, interlinking of retail credit and MFI credit databases as well as inclusion of smaller players (NGOs/Societies/Trusts) need to be addressed so that MFIs are able to comprehensively assess the leveraging status of their borrowers.
“Based on its experience from field visits of over 170 centres (both urban and rural) across 10 states, covering more than 22 MFIs across India, ICRA gathers that while borrowers are largely aware of the RBI norms on multiple borrowing and loan caps, the general field discipline of some MFIs has reduced owing to increased number of members in the centres. A number of borrowers with more than two loans and instances of utilisation of loans for non-income generation purpose were noticed. Additionally, the attendance levels in urban centres were materially lower than in rural centres”, said Ms. Supreeta Nijjar, Vice President, ICRA.
MFI asset quality indicators continue to be healthy (0 days past due (dpd) of ~0.35% as on March 31, 2016), supported by the safeguards put in place by the regulators, including data sharing through credit bureaus, restrictions on overall leveraging of Rs. 1,00,000 per borrower (MFIN directive caps the same at Rs. 60,000), and stipulation that not more than two MFIs can lend to the same borrower. 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 some 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. Nevertheless, the segment remains vulnerable to asset quality shocks owing to the risks associated with unsecured lending business, political risks, and operational risks arising out of cash handling. Given the rising competition, the high pace of growth, and increased focus of some players on individual loans without group guarantee, asset quality indicators could deteriorate from present levels. In ICRA’s opinion, discipline at both the borrower and MFI level, and tactful interventions by stakeholders in tackling field level issues would be the key determinants of asset quality going forward.
During FY2016, banking credit to NBFC-MFIs grew by 60%[2], supported by continuation of priority sector lending status for the sector. Improved access to debt markets for the larger players and increasing share of funding from niche foreign portfolio investors through non-convertible debentures led to the share of debt instruments in overall funding mix increasing from around 9% as on March 31, 2014 to around 16% of the total borrowings as on March 31, 2016. The off balance-sheet funding book also remained sizeable at 16% as on March 31, 2016.
Funding cost witnessed a moderation of around 75-100 bps in FY2016 (at around 11-13% for the larger MFIs and 13.5-16% for the small to medium sized ones). As per ICRA’s estimates, MFIs (excluding Bandhan and SFB licensees) would need to raise incremental debt of Rs. 790-860 billion over the next three years to support a 30-35% growth. ICRA expects fund availability to be good for MFIs over the medium term.
Capitalisation (net worth relative to managed advances) moderated from 23% as on March 31, 2015 to 16% as on March 31, 2016 owing to the higher pace of growth in comparison to internal capital generation and capital infusion. In FY2016, MFIs raised Rs. 6.3 billion of equity (Rs. 7.8 billion, including Bandhan) as compared to Rs. 17.0 billion in FY2015. However, the internal accruals of these MFIs improved considerably to Rs. 12.5 billion in FY2016 as compared to Rs. 6.7 billion in FY2015, reducing the need for external infusion. In YTD FY 2017, the SFB licenses (MFI focussed) have already raised/ tied up Rs. 25 billion of equity. Mr Kalpesh Gada, indicated that “The volume of external capital required to enable MFIs (except Bandhan and eight MFI focussed SFB licensees) to achieve a CAGR of 30%-35% over the next three years would be large at Rs. 16-47 billion (41%-119% of the existing net worth)[3]. Nevertheless, in ICRA’s opinion, given the supportive regulatory environment, past track record of MFIs in raising capital, and the continued investor interest in the sector, MFIs should be able to raise the required capital for growth.”
Over the last one year, MFIs[4] have been able to improve their profitability indicators mainly on account of moderation in operating expenses, improvement in employee productivity, and stable credit costs. Thus, return on managed assets for MFIs improved from 2.6% in FY2015 to 2.8% in FY2016, while the ROE went up from 15.8% to 19.8% over the same period. However, going forward, the net interest margins of MFIs could decline following the reduction in interest rates. However, operating expenses are likely to moderate from the current 7.6% of managed advances to around 7.0% supporting the overall profitability. During FY2017, MFIs are expected to report ROA of 2.3%-2.5% and ROE of 13%-15%, provided discipline at both borrower and lender levels is maintained.
