In July, Ananya Birla’s Svatantra Microfin Pvt Ltd announced the acquisition of Sachin Bansal-led Chaitanya India Fin Credit Ltd in a deal valued at Rs 1,479 crore. The transaction, one of the largest in the sector, is expected to make Svatantra the second biggest player among non-banking financial company-microfinance institutions (NBFC-MFIs) in India with Rs 12,409 crore worth of assets under management (AUM). CreditAccess Grameen Ltd, the largest player, had an AUM of Rs 21,031 crore in March 2023.
Svatantra has entered into a definitive agreement to acquire Chaitanya, a wholly-owned subsidiary of the Navi Group. The transaction is expected to be completed by the end of this year, subject to all regulatory approvals.
Suddenly, the body language of the MFI bosses has changed. There is a spring in their steps. And the investors in this sector, who had been refusing to take even a furtive look at the microfinance entities until recently, are now scouting for the right entities to park their money. Motilal Oswal Financial Services Ltd has recently initiated coverage of three listed MFIs with a buy rating. A few NBFC-MFIs have announced plans to raise equity from the public.
What’s behind the sudden change in the MFI landscape? The industry was struggling with ballooning non-performing assets (NPAs) during the Covid pandemic. As many of them wanted to clean up their books by setting aside money or providing for the NPAs, a few were in dire need of capital but no investor was coming forward. Things have dramatically changed now.
Let’s look at some figures.
The loan portfolio has risen sharply since April 2022, reversing the phase of slow growth in two successive years — FY21 and FY22. The overall microfinance loan portfolio rose 22 per cent in FY23, inching close to Rs 3.5 trillion. And, after a lull of two years, many new borrowers joined the fold last financial year. Between March 2020 and 2021, the number of unique borrowers marginally rose from 58.9 million to 59.3 million. In FY22, the figure had shrunk to 58 million. In FY23, it rose to 66.4 million. (A unique borrower is one who may have taken multiple loans. In other words, the number of unique borrowers is always less than the number of loan accounts. For instance, in March 66.4 million unique borrowers had 130 million loan accounts.)
If we look at the regional distribution of micro loans, east and northeast account for 35 per cent of the pie, followed by south, 28 per cent. When it comes to unique borrowers, the trends are similar: The share of east and northeast is 34 per cent and that of south 25 per cent. Ten states, led by Bihar, Tamil Nadu and Uttar Pradesh, constitute almost 84 per cent of the national micro loan book. Among them, West Bengal has the highest average loan outstanding per account (Rs 28,736), closely followed by Kerala (Rs 28,437).
According to credit information bureau Equifax, MFIs apart, the National Rural Livelihood Mission — a poverty alleviation project implemented by the Ministry of Rural Development, Government of India, which promotes self-employment of the rural poor — also contributes to the spread of micro loans by linking self-help (SHGs) groups with banks. As of March 2023, little over 8.3 million SHGs had an outstanding loan portfolio of nearly Rs 2 trillion. That makes the size of the MFI sector around Rs 5.5 trillion.
Rating agency CRISIL Ltd sees 18-20 per cent growth in the sector between FY23 and FY25, with NBFC-MFIs growing at a faster pace.
Interestingly, for the first time, NBFC-MFIs have become the largest lenders in the sector. In March 2023, banks’ outstanding micro loans were to the tune of Rs 1.19 trillion, lower than NBFC-MFIs’ Rs 1.38 trillion, accounting for 39.7 per cent of the total microfinance universe. A year ago, the banking sector’s exposure to micro loans was Rs 1.14 trillion in contrast to NBFC-MFIs’ Rs 1 trillion. The other entities, which play on this turf, include small finance banks, pure play NBFCs and not-for-profit organisations.
Particularly in the fourth quarter of FY23, the NBFC-MFIs disbursed Rs 40,470 crore, a rise of 37.2 per cent over the year-ago quarter. The average loan size during the quarter also rose by 11.3 per cent.
Finally, what’s happening on the NPA front? The MFI industry had witnessed a sharp deterioration in asset quality during the Covid pandemic. According to the Motilal Oswal report, the so-called PAR30+ book — or the loan not serviced beyond 30 days — which was 1.3 per cent in December 2019, had risen to 14.8 per cent in June 2021 during the second wave of the pandemic. With improvement in macro environment and collection of loan instalments, Microfinance Institutions Network, a self-regulatory organisation for the industry, says the percentage of loans not serviced up to 30 days is 1.13 per cent in March; 45 basis points for 31 to 60 days and 55 basis points for 31 to 60 days. One basis point is a hundredth of a percentage point.
What has changed for the sector? Well, there are many contributing factors to the growth and new-found enthusiasm for microfinance.
Before the Covid lockdown, demonetisation and goods and services tax made the landscape more hygienic. The credit should also go to the Reserve Bank of India (RBI). It had laid down new norms, which came into play from April 2022. There is no cap on loan rates anymore; the lenders are free to decide on interest rates but they need to follow a board-approved transparent policy. Almost all MFIs have raised their loan rates, enjoying better margin. (It’s another matter that banks typically enjoy an even higher margin on micro loans.)
Till recently, MFIs were collecting data about their micro loan borrowers from credit information companies such as CRIF High Mark Credit Information Services Pvt Ltd and Equifax. They were not accessing consumer data such as a borrower’s exposure to consumer loans, two-wheeler loans, etc. taken from other lenders. Now they access both and that gives them an idea of the total indebtedness of a borrower and her ability to pay.
The new norms also created a level playing field for banks and other financial intermediaries on the microfinance turf. Before they came into play, the banks were enjoying an unfair advantage over the MFIs. Now the rules of the game are for micro loans and not microlenders.
Micro loans have also been redefined. The lenders can now give loans for any purpose — education, health, wedding, et al. Before FY23, up to 50 per cent of loans were allowed for non-productive purposes but in reality, 90 per cent were given for income generation. This forced many borrowers to source money from loan sharks at exorbitant rates. The RBI has stipulated that debt repayment should not exceed 50 per cent of household income to ensure that there is no extra debt.
Digital collection of loan instalment — which most MFIs are doing — has brought down the operational cost and cut down the time of cash in transit. The methodology of collection, and the procedures of loan appraisal and disbursement have also changed for most MFIs, raising the level of efficiency.
The RBI needs to effect at least two more changes to make the sector more productive in poverty alleviation and financial inclusion.
The NBFC-MFIs were to have 85 per cent unsecured loans in their portfolio. This has been brought down to 75 per cent to help them derisk their portfolio to some extent. But there is a catch. The old norm of 85 per cent was applicable to net assets, while the new norm of 75 per cent is in relation to overall assets, including cash, bank balance and investments. There is hardly any benefit and an MFI can end up breaching the 75 per cent norm when it raises equity or debt as its cash balance goes up. It should be brought down to at least 65 per cent.
Finally, due to this, the MFIs are not able to provide larger loans to their clients, who have graduated to the micro, small and medium enterprise (MSME) segment, as micro loans can only cover households with Rs 3 lakh annual income. This category is the “missing middle” that is finding it difficult to raise money. The regulator can allow large MFIs to give a certain percentage of their loans to this category to give a fillip to the MSME segment, which is on the national priority list.
This column first appeared in Business Standard
The columnist is a Consulting Editor with Business Standard and Senior Adviser to Jana Small Finance Bank.
His latest book: Roller Coaster: An Affair With Banking
Twitter: TamalBandyo
Website: https://bankerstrust.in
