Good outlook for MFI sector predicted
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.