Is The Indian Microfinance Industry Recovering?

The total loans outstanding for the microfinance space stood at Rs 2.49 lakh crores as of September-end. The current portfolio size has shown a growth of 2.1 per cent since June, and a 6 per cent growth from the year-ago period.

The microfinance industry had been struggling with lower repayments rate since the pandemic, however, the situation has been improving said a report by credit information bureau, CRIF Highmark.

Disbursals See a Marked Increase

The disbursals stood at Rs 62,321 crore for the three months ended September 2021--a quarter-on-quarter growth of 141.56 per cent and a year-on-year growth of 85.8 per cent. The growth in volume terms has been almost equal as well, implying little change in the average ticket size of loans disbursed.

The rapid growth is a sign that demand for microfinance loans is back. In addition, most microfinance loans are taken to establish or fund businesses, possibly indicating higher demand for these businesses. The enquiries from new to credit customers, grew by 18 to 20 per cent during the period. Out of the total enquiries in October 2021, 24 per cent came from new to credit customers, whereas 76 per cent came from other customers.

Small finance banks and microfinance companies are at the forefront of credit disbursals with a 3.3 times growth over the previous quarter (first quarter of financial year 2022). In contrast, disbursals by banks grew by 81 per cent. Nevertheless, banks dominate the MFI business with a 40 per cent market share, with the balance distributed among microfinance banks, small finance banks, and other institutions.

However, 83 per cent of the gross loan portfolio is concentrated in the top ten states led by Tamil Nadu, followed by West Bengal. Out of the top ten states, only Assam and West Bengal saw a decline in the gross loan portfolio. Banks and microfinance companies mainly cater to the east, with 45 and 33.2 per cent concentrated in these areas, respectively. In contrast, small finance banks focus on the south with a 40 per cent exposure in southern states.

Pressure on Asset Quality Reducing?

The pressure on repayments appears to be easing as well, with the portfolio at risk ratio for loans that are more than 30 days past their due date improved from 15 per cent in July 2021 to 10 per cent in September 2021. For the loans that hadn’t been paid back after 90 days, the due date remained stable at 3.3 per cent.

However, the loans that have not been repaid after 180 days past the due date, reached 8 per cent in September 2021. The difference between the top lenders and the worst performing lenders is large in the 30+ day delinquency category, with top lenders seeing payment delays for 5 per cent of their loans, while the bottom five stand at 18.9 per cent.

Write-offs have increased from 5 per cent in the previous quarter to 5.1 per cent. These numbers have been calculated for the largest lenders in the organised space with 84 per cent market share.

Ticket sizes of loans for the Rs 30,000 to Rs 50,000 category retained the highest market share at 36 per cent. The major part of the loan share is contributed by loan tick sizes lower than Rs 50,000, while the loans above Rs 50,000 contribute to a smaller share.

In the first quarter of financial year 2021, (Q1 FY21), smaller loans saw greater demand as business operations scaled down and institutions turned conservative. Overall, the ticket size for the quarter ended September 2021, has declined by 2 per cent in comparison to the previous quarter.

While these signs are positive and show the improving performance of the microfinance sector, risks from the threat of the third pandemic wave still looms on India. Small businesses were the hardest hit, as most of these businesses depend on physical sales of products or services. The number of borrowers who used the moratorium period was high as well.

As a consequence, microfinance companies saw delinquencies rise. For most states, a major part of microfinance demand comes from rural areas. Though these areas are not as hard-hit as urban areas are, a generic period of low demand due to lockdown and economic downturn does affect rural areas as well.

Also Read: Micro-Finance Might Be A Boon For Borrowers, Not So Much For Investors