MFIs on consolidation path

Competition rises as banks get into the segment and new small finance banks become operational

While microfinance institutions (MFI) are yet to tide over the impact of the currency demonetisation, intense competition and reports of over-borrowing have surfaced as new grey areas.

At least two recent reports, one by CRIF High Mark and another by ICRA, say MFIs are showing signs of over-leveraging.

CRIF High Mark says of about 42 million unique MFI customers, six per cent have loans with more than two lenders. And, a third of these customers have active loans with more than two non-bank MFIs (NBFCMFIs). Further, the report says, 70 per cent of such borrowers have three or more loans; 17 per cent are even servicing five loans at a time.

The ICRA report says: “The government’s demonetisation action of November has brought to the forefront several long-standing concerns in the sector. Viz, high pace of growth, over-leveraging of borrowers, potential dilution in the rigour of the lending process and the possibility of loans being used for consumption, rather than for income generation.”

According to the Reserve Bank of India (RBI) guidelines, an individual borrower can take loans up to ~1 lakh from two MFIs at the most. As a selfregulatory measure, MFIs have kept the ceiling at ~60,000.

Given the small proportion of indebtedness, MFIs are not in a crisis but competition in the space is perceptible. Reasons Till about two decades earlier, microlending was a niche segment, with a few non-profit organisations and trusts dominating the market. Till 2010, the sector was unregulated, when a crisis leading to a large number of farmer suicides in Andhra Pradesh drew RBI’s attention. The subsequent stiff regulations sieved out the weaker institutions and helped the bigger institutions, especially outside Andhra. The segment emerged as a regulated and disciplined one, with stronger financials. In 2014, when Bandhan got a licence to start a bank, it was symbolic of the reversal of MFI fortunes. The next year, of 10 licences for small finance banks (SFBs), eight went to MFIs.

NBFC-MFIs saw loan portfolio growth of around 84 per cent yearon-year as on September 2016, at ~55,254 crore.

Private banks have became aggressive in micro-lending. From being nowhere in the micro credit space till some years earlier, banks now have 27 per cent of loan dues. Of the ~81,590 crore of microfinance loan dues as on end- September, the share of banks was ~21,704 crore (excluding the MFI portfolio of Bandhan Bank at ~15,300 crore as on end-March 2016).

Notably, even as net interest margins in banks are under stress, those in MFIs are still healthy at 2-2.5 per cent. In the next two months, all the 10 new SFBs will be operational and competition for micro-lending is expected to intensify.

According to the report by CRIF High Mark, top-up loans are a potential source of over-heating in the MFI market. These are defined by High Mark as loans of ~10,000 or less, and of a short tenure of nine months or less, with customers having at least two active loans. Notably, the third or fourth loan is often given by a bank of a non-MFI entity, and a single MFI borrower can get loans from only two MFIs at a time. However, experts do not necessarily agree that top-up loans are a problem. “Topping up of loans does not necessarily mean over-indebtedness. Technically, nothing prevents MFIs from giving ~60,000 in more than two instalments. In fact, that is a better way to assess the risk profile of a customer. There is no regulation that says other entities cannot lend. For example, a bank or an SFB can always lend to a borrower,’’ says Ratna Vishwanathan, chief executive officer (CEO) at Microfinance Institutions Network.

“The core problem with MFIs,” says Alok Prasad, a former CEO of MFIN, “has been their supranormal growth over the past three years or so. This, fortunately, has not translated into a crisis. The reasons are primarily the greater institutional strength of MFIs, the extent of the problem (over-leveraging of clients) being limited to certain geographies and, above all, the capacity of the industry to deal with issues on the ground.” Consolidation With this rapid growth, consolidation seems inevitable. Notably, with the cost of funds dramatically reducing for SFBs from around 14 per cent to eight per cent (their average cost of term deposits), they are likely to give intense competition to small MFIs. The latter get loans from banks at 16-18 per cent.

Demonetisation, along with rumours of debt waivers, added to the problems at MFIs, especially the smaller ones. According to MFIN data, available till December 15, repayment collection by MFIs was 84 per cent, against the general mark of 99 per cent. These improved in January but have not normalised. States in which rumours of debt waiver have led to defaults are Maharashtra, Madhya Pradesh, Uttarakhand, Karnataka and Uttar Pradesh. In some areas, repayments had dropped by 25-30 per cent.

“The bigger NBFC-MFI players are becoming banks. Some of the small and mid-sized MFIs have been acquired or have seen stake purchases by banks. Hence, there is already a consolidation in the space. The cost of funds for small and mid-sized MFIs is higher compared to the MFIs which became banks. More, interest rates (that they charge borrowers) are capped by RBI guidelines. So, the smaller players will face more challenges. Some of them might need to diversify or merge with bigger players,” says Kalpana Pandey, CEO at CRIF High Mark.

“Within a couple of months, around eight SFBs would be fully operational. Many of the regular commercial banks, including those which have acquired MFIs, are building their micro finance business. Hence, the competitive landscape is changing dramatically. This change has to be viewed as a process, not an event. Over time, it will lead to a much more challenging business environment, particularly for the small players. MFIs with a loan book of under ~100 crore or so are already facing significant problems. Those having a portfolio of ~100-500 crore are also challenged but their ability to withstand the market challenge is much greater. Alongside, the size and scale of operations would make them a more interesting target for takeover,” said Prasad.

With private banks foraying into the space, consolidation has already started. In 2016, Kotak Mahindra Bank acquired Bengaluru-based BSS Microfinance. Earlier, RBL Bank acquired a 10 per cent stake in Utkarsh Micro Finance, which is now an SFB. In July 2016, IDFC Bank acquired Trichy-based Grama Vidiyal Microfinance, its second deal in the space. Earlier, IDFC had taken 10 per cent equity in East India-based ASA International India Microfinance. And, last March, DCB Bank had acquired 5.81 per cent in Odishabased Annapurna Microfinance.

“There will be consolidation, as the business is reaching a certain scale, and will require a new set of managerial scale and technological requirement. When financial institutions reach mid-stage, there is a reason for consolidation,” according to an official of a private bank.

In sum, the fitter one is, the better the chance for survival.

Demonetisation, along with rumours of debt waivers, added to the problems at MFIs, especially the smaller ones