Microfinance sector could treble in 4 years

According to an estimate by the ICRA, the country’s microfinance sector will grow nearly three-fold to reach up to Rs 4.3 trillion over the next three years on account of expansion into newer segments and enhanced average loan sizes.

• The estimate includes micro credit across self-help groups, microfinance institutions and banks.

Important observations made:

• If the ticket sizes were to double from the current levels over the next 3-4 years and MFIs were to increase their presence in under-penetrated areas, the microfinance market could reach Rs 3.3-4.3 trillion over the next 3 to 4 years. The assumption on the doubling of ticket sizes is based on improving income levels, inflation, higher eligibility of borrowers moving to higher loan cycles.
• The MFI sector, excluding Bandhan Bank and teh SFBs, will need external capital of Rs 16-47 billion over the next three to four years.
• While the business opportunity is exciting, there is a need for establishing a credit culture in the new geographies and strengthening the credit appraisal processes.
• The two operational credit bureaus have helped the sector maintain its asset quality. But there are a few issues yet to be addressed like limited coverage of SHG bank linkage programme data, issues related to multiple identity cards being used by borrowers for availing loans from more than two MFIs and interlinking of retail credit.
• The overall stress of credit which is due for more than a day stood at 0.35% as of March 31, 2016, helped by regulatory decisions like data sharing through credit bureaus, cap of Rs 1 lakh for overall borrowing and the stipulation for not more than two MFIs to lend to a single borrower. However, “communal and political” incidents in Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand and Karnataka did lead to some pressure on asset quality.
• However, the sector remains vulnerable to asset quality shocks owing to the risks associated with unsecured lending business, political risks, and operational risks arising out of cash handling.

Background:

The Indian microfinance institution (MFI) sector grew 40% in 2015-16 to Rs 1.4 trillion as against a 38% growth in the previous fiscal, while the average ticket sizes were Rs 20-25,000.