Good out­look for MFI sec­tor pre­dicted

Banking Frontiers - - Research Notes - Sfbs - Mo­[email protected]­ingfron­tiers.com

In a sep­a­rate study, ICRA finds that the In­dian mi­cro­fi­nance sec­tor (in­clud­ing the SHG Bank Link­age Pro­gram) grew 25% (an­nu­al­ized) in Q1 FY2019 to `2250 bil­lion. This growth was sup­ported by good col­lec­tion ef­fi­ciency, con­tin­ued in­vestor sup­port, fund­ing avail­abil­ity and de­mand for mi­cro­cre­dit. 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 de­mon­e­ti­za­tion, 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 30 June 2018 from 25% in Septem­ber 2016.”

The re­port pointed out that banks were the most sig­nif­i­cant providers of mi­cro­cre­dit (60%) as on 30 June 2018, fol­lowed by NBFC-MFIs at 26% and Small Fi­nance Banks at 14%. ICRA ex­pects the share of banks to ex­pand with the ex­pected merger of Bharat Fi­nan­cial In­clu­sion and In­dusInd Bank and the in­creased fo­cus of banks on grow­ing their BC port­fo­lios.

The agency, how­ever, cau­tions that 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, the study adds.

The agency’s 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, it says.

ICRA also 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.

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