Microfinance institutions (MFIs) have emerged stronger from multiple crises in recent past like demonetisation and Covid, and their near-term outlook remains positive on the back of factors like regulatory clarity, use of technology and declining credit cost, analysts said.
In a report, ICICI Securities said the MFI sector is well poised to deliver 20 percent-plus AUM growth by FY24.
The MFI assets growth trajectory went through rough patch during the Covid-led disruptions and regulatory changes. However, Q2FY23 onwards, the growth in assets under management (AUM) began showing a strong uptick, it noted.
The Telangana High Court recently ruled that states cannot control microfinance institutions regulated by the Reserve Bank of India. This would provide better clarity on the MFI regulatory framework and eliminate any possibility of dual regulations, the report said.
Also Read: Telangana HC order on MFI regulation a boon for sector, say experts
Andhra Pradesh and Telangana offer potential growth opportunity of around Rs 600 billion (more than 20 percent of the industry AUM as on September 2022. Only about 5 percent of total MFI lending opportunity was tapped by MFIs in these two states till then.
ICICI Securities further said that the average credit cost for its coverage universe - CreditAccess Grameen, Spandana, Fusion, Bandhan, Ujjivan and Suryoday - spiked to over 5 percent during the Covid phase.
However, increased government support like moratorium and ECLGS between FY20 and FY22 and focused approach from lenders to improve collection led to a gradual moderation in credit cost.
“We expect the declining trend in credit cost to continue in FY24 and remain at an average of 2.3 percent for our coverage as against 3.4 percent in FY23,” it said, adding that the credit cost in FY24 is likely to remain lowest in the past five years.
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While new customer acquisition was muted during FY21-22 due to the pandemic, H1 FY23 started on a strong footing.
“Unique customer base grew strongly by 15 percent between March and September 2022. With steady improvement in collections and subsiding asset quality challenge, MFI players have accelerated new customer acquisition during H1FY23,” it added.
Within the sector, ICICI Securities prefers NBFC-MFIs like Spandana Sphoorty Financial Ltd and Fusion MicroFinance.
Shifting of trends
Domestic brokerage Anand Rathi hosted a virtual investor conference with various experts from the microfinance industry and rural finance space, and among the key insights which emerged was that asset quality concerns are behind the industry for now with collections back at 99 percent levels.
Also, before the pandemic, MFI loans were purely for income-generation whereas, post pandemic it has been more towards consumption as spends are higher and income levels have improved, Anand Rathi said in a note.
Earlier, the younger generation did not come forward for loans as most of the rural economy revolves around agri landholding and activities. But this trend has been changing in the last few years.
It also highlighted the growing use of technology in the MFI space.
Pre-pandemic there was no direct transfer to client accounts but now there is 100 percent cashless disbursement. “With penetration of UPI, the process of collection has become efficient and soon entire collection infra will be tech-enabled,” it added.
India’s microfinance industry clocked a 25.2 percent year-on-year growth in the loan book at the end of the December quarter, as per latest data from industry body Microfinance Institutions Network (MFIN).
The gross loan portfolio grew to Rs 3.2 lakh crore at the end of December from Rs 2.56 lakh crore in the year-ago period.
MFIs are companies that give small loans to low-income borrowers and typically source money from banks to do business.
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