Microfinance institutions, which went through a rocky start and crisis during the Covid-19, have started seeing good traction for their business models. This has been primarily due to a steady improvement in asset quality in recent years, as lenders have strengthened underwriting standards.
“The microfinance sector as a whole has seen so many shocks and that has helped it become resilient. This has helped increase confidence in the sector’s prospects,” Alvarez & Marsal Managing Director Bhavik Hathi said, adding that the evolution of regulations for microfinance institutions indicate that the regulator is confident about the resilience of the sector.
According to the latest results, the gross non-performing asset ratio of some of the leading players such as CreditAccess Grameen improved to 0.77% as on September from 2.17% a year ago. Similarly, the gross non-performing asset ratio of Fusion Microfinance fell to 2.68% as on September 30 from 3.83% a year ago.
The microfinance segment witnessed a spike in asset quality stress due to the impact of COVID-19 on the income profile of low-income groups and delays in debt servicing by these borrowers.
The gross non-performing asset ratio rose to 6.26% on March 31, 2022, from 2.05% as on March 31, 2020, owing to a steep rise in slippages, CareEdge Ratings said in a recent report.
Additionally, equity infusion into the microfinance segment slowed down, which resulted in elevated debt-to-equity ratios in 2020-21(April-March) and 2021-22.
Broadly, the pandemic hampered the progress of a segment, which had been forced to recalibrate following the Andhra Pradesh microfinance crisis a decade ago. While the microfinance segment once thrived in the former state of Andhra Pradesh, it experienced a significant setback following the enactment of the 2010 ordinance by the state government.
The ordinance imposed tight regulations on the operations of microfinance institutions within the state. It came in the wake of microfinance lenders employing unethical methods for loan recovery, which resulted in borrower suicides.
Among others measures, the ordinance directed all microfinance institutions to mandatorily register with district authorities. Also, it required all microfinance institutions to publicly disclose the interest rates applied to their loans.
As a result of this, the contribution of Andhra Pradesh to the gross loans of microfinance institutions fell to 0.3% as on March 31, 2018 from 65% as of March 31, 2011. The crisis resulted in a substantial loss of Rs 7,000 crore for Andhra Pradesh-based lenders, say experts.
But, lenders received a shot in the arm earlier this year, when the Telangana High Court held that Reserve Bank of India (RBI) registered non-bank lenders operating Andhra Pradesh will not be governed by local state enactments. Experts feel that this verdict is another indicator of growing optimism towards the sector’s prospects.
“Unlike in 2010, the microfinance sector has become well regulated now with the prudent norms and strict regulatory guidelines brought by the RBI over the years,” says Satin Creditcare Network Chairman and Managing Director H.P Singh.
Singh added that self-regulatory organisations has played an instrumental role in bringing out a unified code of conduct for lenders.
With the increase in digital adoption, credit history of each of the borrowers in the microfinance space is readily available. As a result of this, the ability of microfinance lenders to underwrite loans has improved significantly, say experts.
CareEdge Ratings expects the gross non-performing asset ratio of microfinance to fall to 2% by March 31 2024 owing to a steady improvement in collection efficiency of lenders.
In its latest move, the RBI asked banks and non-bank lenders to maintain higher risk weights for unsecured personal loans. But, the exclusion of microfinance companies from these norms works in their favour. It indicates that regulatory concern over stress in microfinance loans have largely abated, say experts.
“Microloans help borrowers meet consumption needs or meet cashflow mismatches during the month. On the other hand, the microfinance ecosystem utilises finance for creating or running their businesses,” Vivek Iyer, Partner, Financial Services – Risk, Grant Thornton Bharat said.
Here, Iyer contends that while microfinance loans are not secured by a collateral, delinquencies are unlikely to be substantial.
Apart from the improvement in asset quality, the gross loan portfolio of microfinance institutions rose 24.3% y-o-y to Rs 3.6 trillion as on June 30 due to a strong demand in rural markets, latest data from CRIF High Mark showed. The 2022 microfinance norms have enabled lenders to enter new geographies and diversify their portfolios.
Microfinance-focussed non-bank lenders hold the dominant portfolio market share of 40.4% in the segment, followed by banks at 32.5%, and small finance banks at 17.2%, the CRIF High Mark report showed.
The steady growth of the microfinance segment in recent years as well as the robust recovery from the impact of COVID-19 has led to a renewed interest from equity investors and wholesale lenders.
Experts note that the strong response to the initial public offering of Fusion Microfinance in November 2022 is a prime example of the growing optimism towards the segment.
“Microfinance is always a positive segment because a large portion of our country lives in the hinterland. Any financial institution that provides credit to them is always good for the economy. With this logic, the microfinance segment is here to stay,” Iyer said.