Fusion Finance Ltd, a listed microfinance company, has recently said\u00a0that it might need to make an additional provision of Rs 500-550 crore in the September quarter of 2024-25 (FY2025) to address rising bad loans. In the first quarter, Fusion had made a provision of Rs 348 crore.<\/p>\n
In a stock market filing on September 21, Fusion stated: \u201cSince the release of the Q1 FY25 results, the management of the company has been focused on tracking the evolving credit behaviour of its borrowers. \u2026 Based on trends thus far\u2026 it is likely that the company may be required to make an estimated credit loss provisioning between Rs 500 crore to (sic) Rs 550 crore\u2026 The estimated credit loss provisioning may undergo revisions upon finalisation of the Q2 FY25 results.\u201d<\/p>\n
A microfinance analyst estimates the September quarter annualised credit cost of the company at 17 per cent, sharply higher than the June quarter\u2019s annualised credit cost of 11.8 per cent.<\/p>\n
Fusion had taken note of the \u201cevolving credit behaviour\u201d of its microfinance borrowers in the June quarter.<\/p>\n
During an earnings call, its MD and CEO, Devesh Sachdev, had drawn the attention of analysts to how borrower leverage had been increasing. The number of borrowers with more than four loans (drawn from different lenders) had risen \u201csignificantly.\u201d<\/p>\n
\u201cMany of our onboarding customers have gone ahead and taken two or more loans \u2026 beyond their repayment capacity. We saw the impact of this on our portfolio, as some of our leverage clients were unable to service the instalments even after multiple follow ups,\u201d Sachdev had said.<\/p>\n
He had made this comment after drawing analysts\u2019 attention to Slide No 8.<\/p>\n
What did that slide say?<\/p>\n
The percentage of \u201cunique\u201d customers \u2013 those who have taken a loan only from Fusion \u2013 was 33.4 per cent in March 2023. That has since dropped to 30.9 per cent. Similarly, the percentage of customers who have taken a loan from another entity, in addition to Fusion, fell from 30.1 per cent to 19.7 per cent. Most disturbing is the jump in customers with three, four, or even more loans, from 6.1 per cent to 16.9 per cent.<\/p>\n
Also, the percentage of Fusion borrowers with loans up to Rs 40,000 has dropped from 39.4 per cent of total borrowers to\u00a030.7 per cent between March 2023 and March 2024.\u00a0\u00a0Meanwhile, the percentage of borrowers with at least Rs 100,000 in microloans has increased from 22.7 per cent to 32.2 per cent.<\/p>\n
Many believe that Slide No 8 sounded the alarm for India\u2019s microfinance industry, which had 159.3 million accounts in March. Of these, 86.6 million accounts belong to unique borrowers; the rest have more than one account. The question is, how many and what percentage of borrowers have five, six, or more loans?<\/p>\n
I came across one instance where a woman had 14 loans and applied for yet another. She needs Rs 45,000 to pay her loan instalments but earns only Rs 30,000 per month. Of this, she spends Rs 12,000 to run her household, leaving Rs 18,000 to service her debt. Her solution? Taking fresh loans to repay her existing ones!<\/p>\n
The MD of a credit bureau confirmed this instance. There are many such borrowers even though their percentage may not be high.<\/p>\n
Between FY17 and FY24, the total microfinance loan book grew from Rs 1.07 trillion to Rs 4.34 trillion, at a compound annual growth rate (CAGR) of around 22.1 per cent (all figures are rounded off). Over the same period, the number of unique borrowers rose by just 6.9 per cent, while the loan per borrower CAGR increased by 14.3 per cent.<\/p>\n
Alok Mishra, CEO of the Microfinance Institutions Network (MFIN), one of two self-regulatory organisations (SROs) for the microfinance sector, disputes concerns over over-leveraging. According to him, the growth in average outstanding loan per borrower has broadly kept pace with inflation. It was Rs 39,353 in March 2020, and Rs 55,260 in March 2024. Considering average inflation of 5 per cent, it should have been Rs 47,833 in March 2024. After adjusting for inflation, the rise is around Rs 7,000. Is that too much?<\/p>\n
He also points out that the proportion of borrowers with outstanding loans exceeding Rs 1.5 lakh has increased to 4.7 per cent, but still represents a small segment. Nonetheless, MFIN has put in place safeguards as a proactive measure to ensure discipline in field operations and borrower welfare.<\/p>\n
What are these guardrails? To mitigate asset quality challenges, MFIN and Sa-Dhan, another SRO, have introduced measures such as capping a borrower\u2019s loan repayment obligation at 50 per cent of household income, as prescribed by the Reserve Bank of India (RBI), limiting the number of microfinance lenders per borrower to four, and capping total indebtedness at Rs 2 lakh.<\/p>\n
The industry had witnessed a sharp deterioration in asset quality during the Covid pandemic. According to a Motilal Oswal report, the PAR30+ book \u2013 loans not serviced for over 30 days \u2013 rose from 1.3 per cent in December 2019 to 14.8 per cent in June 2021, during the second wave of the pandemic. Subsequently, that decreased dramatically.<\/p>\n
Before the Covid lockdown, demonetisation and the implementation of the goods and services tax (GST) helped clean up the landscape. Shortly after, the RBI\u2019s new microfinance norms\u00a0came into play from April 2022. There is no longer a cap on loan rates; lenders are free to set interest rates, but they must follow a board-approved, transparent policy.<\/p>\n
The new norms also created a level playing field for banks and other financial intermediaries. Earlier, banks had an unfair advantage over micro lenders. Now, the rules apply to micro loans rather than microlenders. Micro loans have also been redefined, allowing lenders to provide loans for any purpose, such as education, health, or weddings, as long as debt repayment does not exceed 50 per cent of household income.<\/p>\n
All these have changed the lenders\u2019 approach. They want to lend more and more.<\/p>\n
There has been a structural shift in the microfinance space. Almost all microfinance institutions (MFIs) have raised their loan rates to recoup losses during the Covid-19 period. But how many have reduced rates after recovering those losses?<\/p>\n
Growth in the sector appears driven more by lenders\u2019 obsession to disburse loans rather than by borrower demand. To complicate matters, borrowers are being pursued by various types of lenders \u2013 universal banks, small finance banks, non-banking financial companies (NBFCs),\u00a0MFIs, and fintechs.<\/p>\n
When one has easy access to a variety of loans \u2013 personal, education, home, two-wheeler, tractor, consumer loans, and more \u2013 it becomes difficult to resist the temptation to borrow more. Borrowers are taking on more debt at higher costs as the cost of intermediation is rising with banks giving loans to large NBFCs. Large NBFCs, in turn, are giving loans to small NBFCs, and so on. This weakens borrowers\u2019 ability to repay.<\/p>\n
Not every micro lender is willing to acknowledge there\u2019s a problem. They cite various reasons for the sudden deterioration in asset quality, from prolonged heatwaves to floods, elections, debt waivers, and external agitation by different groups\u00a0in different parts of India. Over-lending? No, they say they don\u2019t do that.<\/p>\n
Last year, rating agency Crisil Ltd predicted 18-20 per cent growth in the sector between FY23 and FY25, with pure-play microfinance entities expected to grow at a faster rate. A recent Crisil report notes that credit costs for microloans could rise from 2 per cent in FY24 to 3-3.5 per cent in FY25.<\/p>\n
To complicate matters further\u00a0for the MFIs is the high employee turnover rate, or the percentage of employees leaving a company \u2013 60 per cent, according to an ongoing study. This affects the lender-borrower connection, which is key to the success of microfinance, and impairs lenders\u2019 ability to collect repayments.<\/p>\n
The RBI has been watching the scene and occasionally commenting on it. Will it act?<\/p>\n
This column first appeared in <\/strong>Business Standard<\/em><\/strong>. The author, a Consulting Editor of<\/strong> Business Standard,<\/em><\/strong> is a Senior Adviser to Jana Small Finance Bank.<\/strong><\/p>\n Writes Banker’s Trust every Monday in Business Standard.<\/strong><\/p>\n