MFI industry sees recovery amid persistent headwinds

The pandemic and its multi-pronged effects have been few of the most talked about topics for any country around the globe for the last one-and-a-half-years. Microfinance sector in India also got hit by this pandemic and is facing another big crisis after demonetisation in 2016. Small and micro loans serve large segment of population running small and micro enterprises mostly in unorganised livelihood domains.

The good news is that the microfinance sector in the country is showing signs of nascent recovery. According to 2QFY22 update by CRIF High Mark, microfinance AUM (asset under management) grew two per cent QoQ, led by nearly one per cent growth each in customer and average exposure per customer. Lenders have pulled back delinquencies helped by recovery in borrower cash-flows as well as probable support from fresh short-term loans. In absence of the data on restructured loans, the bureau data likely does not reflect the full asset quality picture. The sector is gradually healing, even as fresh concerns on Covid (in the form of Omicron) will continue to create fresh headwinds.

Going by the MFIN report (March, 2021), the sector currently caters 3.22 crore clients with gross loan portfolio of Rs74,371 crore. This converts to average loan amount of Rs22,000 plus for all active accounts, which shows six per cent YoY increase. The sector holds a strong position, when it comes to return on investment in monetary and social returns. Earning capacity of MFI clients has been on the wane and that in turn was almost becoming a threat to MFI existence. The government, on its parts, is trying to smooth out its operations through rescheduling of loans.

Going by CRIF's latest industry data (as of 2QFY22) the receding impact of Covid is visible on all fronts, after a painful 1QFY22. Microfinance institutions (MFI) industry loans stood at Rs2.5 trillion, growing by two per cent QoQ due to 2.5 times QoQ growth in disbursements and a flat borrower base and marginally higher write-offs during the quarter. Average borrower balance grew nearly one per cent QoQ, similar to the growth in active loan accounts. Banks seemed to have taken a backseat in growth with higher share of disbursements from SFBs and NBFC-MFIs during the quarter, a trend in contrast to the trend observed since the beginning of Covid. Growth recovery is visible in improved customer inquiry volumes with growing share of new-to-credit customers.

It is pertinent to mention here that since the beginning of the Covid (March 2020), the industry has shed seven per cent of its borrower base with nearly 15 per cent increase in average exposure per borrower. At a portfolio level, the share of above Rs50,000 ticket loans has increased to nearly 30 per cent of AUM compared to nearly 23 per cent a year ago. Also, the AUM growth in recent quarters is notably higher either in the low-ticket segments (below Rs15,000) or the higher-ticket segments (below Rs50,000). This could reflect higher comfort levels in giving top-up loans during times of pressure on collections and also disbursements towards existing higher vintage borrowers.

The Reserve Bank of India's various recent moves to bring harmony across class of lenders in microfinance field has gone down well among the MFIs. Considering the various kind and sizes of lenders operating in the sector this was the need of the hour. It will certainly improve lending in the sector as well as safeguard the interests of the borrowers.