ICRA: MFI sector back on growth track, but new challenges on the horizon - MYREALITY.In, Real Estate, Share Market, Mutual Fund, Insurance
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Friday, September 28, 2018

ICRA: MFI sector back on growth track, but new challenges on the horizon

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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ICRA: MFI sector back on growth track, but new challenges on the horizon Reviewed by Investment Guru on September 28, 2018 Rating: 5 ICRA: MFI sector back on growth track, but new challenges on the horizon ·          Industry expected to post around 20-22% growth ·   ...

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