Tag: microfinance sector

Microfinance sector: Average collection efficiency improves to 95% in Q2 from 85% in Q1

Banking & Finance

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Talking to FE, Satish said collection efficiencies in Assam and Kerala improved in the second quarter compared to the first, but the figures lagged far behind the national average due to “external issues”.

The country’s microfinance sector saw a significant improvement in loan repayments in the second quarter of the current fiscal year, when average collection efficiency for micro loans increased to over 95% from around 85% in the first quarter.

Asset quality of the lenders of the sector improved on a sequential basis with portfolio at risk (PAR) above 30 days falling to 10.18% as on September 30 from 16.56% as on June 30, 2021, according to the quarterly review of the sector by Sa-Dhan, a self-regulatory organisation for the sector.

At the end of the second quarter, this fiscal year, the micro credit portfolio of the lenders stood at Rs 2,25,331 crore, down by 1.1% year on year. Total disbursement of all lenders, however, grew 95.4% YoY to Rs 66,694 crore in the second quarter of FY22 compared to Rs 34,135 crore during the same period of FY21. Average ticket size also rose to Rs 35,106 from Rs 34,756.

Sa-Dhan executive director P Satish said, “The sector which was affected in Q1 of this financial year due to the second Covid wave, has seen improvement in repayments and fresh disbursements. The decline is slowing down, although there remains stress on fund access and operations of mid- and small- MFIs.”
Satish said Sa-Dhan hoped and expected a gradual recovery by the third quarter as borrowers’ incomes further stabilised. “We have written to the government to sanction an additional `7,500 crore under the Credit Guarantee Scheme for the sector,” he said.

Talking to FE, Satish said collection efficiencies in Assam and Kerala improved in the second quarter compared to the first, but the figures lagged far behind the national average due to “external issues”.

The Assam government has started the process of providing the one-time relief to the stressed microfinance borrowers in the state after it had signed a memorandum of understanding with microfinance lenders in August for implementation of the relief scheme. For Kerala, high number of Covid positive cases and the recent flood impacted loan repayments.

For the industry as a whole, portfolio at risk (PAR) above 60 days improved to 4.72% as on September 30 from 6.41% as on June 30, 2021. And, PAR above 90 days stood at 2.96% at the end of the second quarter as against 3.01% at the end of the first quarter this fiscal year.

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Microfinance sector hit as defaults surge in pandemic, BFSI News, ET BFSI

Personal Finance

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MUMBAI: Small loan specialists in India that typically cater to people without bank accounts are facing a jump in pandemic-related defaults that could force some of them out of business, industry experts warn.

Loans overdue by 30 days are expected to reach 14-16% of all so-called microfinance loans in the immediate aftermath of the second Covid-19 wave sweeping India, said Krishnan Sitaraman, senior director at credit rating agency CRISIL.

That’s higher than 6-7% in March, before the second wave took hold, and also above the 11.7% reached in March 2017 after demonetisation drive – an attempt to boost digital transactions and crack down on undeclared money that also hit microfinance lenders hard.

“Older loans that were taken in 2019 or early 2020 are at a higher risk of defaults and they form about 60-65% of the loan book for lenders,” said Harsh Shrivastava, former head of the Microfinance Institutions Network, an association representing the sector in India.

Rahul Johri, chair of Vector Finance, a microfinance firm that provides loans to small enterprises, said many support measures brought in by the government had only helped larger institutions, while smaller players had struggled.

“It has become an existential issue for several small and mid-sized microfinance institutions as the business has been severely impacted and collections are down,” said Johri.

Loan collection efficiency across the total loan pool has fallen to about 70% from a peak of nearly 95% in March, analysts say, indicating a potential build-up in stress.

The gross loan portfolio of India’s microfinance lenders stood at 2.6 trillion rupees ($35 billion) as of March 31, according to CRISIL.

Bumpy road ahead

Despite the short-term challenges, some remain bullish on the sector and expect it to bounce back if an anticipated third wave of Covid-19 infections in India is not so severe.

“About 55% of the market is still untapped which means there is a huge market opportunity … so things will look up soon,” said Johri.

But for now, many smaller microfinance firms are struggling.

Such companies, typically with loan books of less than Rs 500 crore ($67 million), have also seen their cost of funds rise by 100-150 basis points as banks and companies have become less willing to lend to them, said one industry executive, speaking on condition of anonymity.

Some microfinance firms have had to scale back capital raising plans due to tepid interest from investors, said the heads of two firms that have been looking to raise funds.

As smaller players falter, some have stopped paying salaries, or incentives to employees in recent months, they added, asking not to be identified due to the sensitivity of the matter.

“We are now only getting basic salaries, incentives have completely stopped in the last few months as collections are down,” said a collection agent at one microfinance lender in eastern India.



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Banks’ microfinance gross loan portfolio grows, SFBs see de-growth: Report

Banking & Finance

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The portfolio outstanding of microfinance sector stood at Rs 2.54 lakh crore as of March 2021, with 10% quarter-on-quarter growth and 8.4% year-on-year growth.

The gross loan portfolio (GLP) of banks in the microfinance sector grew 15.5% year-on-year to Rs 1.06 lakh crore at the end of the previous fiscal while that of small finance banks (SFBs) de-grew 6.6% y-o-y to Rs 41,708 crore, according to a report published by credit bureau CRIF High Mark.

The 15th edition of CRIF MicroLend, released on Thursday, showed that banks continued to dominate the microfinance market with a portfolio share of 42% at the end of FY21, up from 39.4% in FY20. Significantly, SFB’s market share in the last fiscal declined to 16.4% from 19.1%.

During the third quarter of FY21, the market share of banks and SFBs stood at 41.7% and 16.9%, respectively, in the microfinance space. Between Q4FY20 and Q3FY21, NBFC-MFIs’ market share stood almost the same at around 30%, while it grew to 30.6% at the end of Q4FY21.

Interestingly, earlier this month, P N Vasudevan, managing director and CEO of Equitas Small Finance Bank, said its conscious plan to grow the unsecured micro finance book at a “slower pace’ compared to the rest helped mitigate the overall credit cost impact. “As of March 31, 2021, the unsecured microfinance advances were 18% while the remaining 81% were secured loans. The least impacted product, small business loans secured by house property, constitutes 45% of the total advances,” Vasudevan said.

“Microfinance industry demonstrated strong resilience and recovered in Q2 after muted business in Q1FY20-21. Loan disbursements in Q3 and Q4 of FY21 were similar to previous year’s respective quarters,” said Vipul Jain, head of products, CRIF High Mark, while releasing the report.

The portfolio outstanding of microfinance sector stood at Rs 2.54 lakh crore as of March 2021, with 10% quarter-on-quarter growth and 8.4% year-on-year growth.

“Delinquency was higher in Q3 and Q4 of FY20-21 compared to pre-Covid levels. We hope to see these numbers move back to their historic levels in coming quarters,” Jain said.

The report said early delinquency (1- 30 days) reduced by 3.6% in March 2021 compared to December 2020 from 8.7% to 5.1%. Microfinance loans with repayment delays of over 30 days (30+% delinquency) remained high for West Bengal, Assam and Maharashtra.

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Seven ways RBI’s new uniform framework will affect microfinance sector, BFSI News, ET BFSI

Banking & Finance

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The proposed uniform regulatory framework for the microfinance sector by Reserve Bank would help the sector expand, become competitive yet safeguard the borrowers from the debt trap.

Under the new proposed rules, microfinance institutions (MFIs) can provide collateral-free loans to households at interest rates determined by their boards. They will get the freedom to set rates and end regulatory cap on interest rates

The RBI has proposed a debt-income ratio cap so that the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income.

Here’s how the changes will impact the sector, companies and the borrowers

The proposed regulations provide more flexibility to non-banking finance companies-microfinance institutions (NBFC-MFIs) in the pricing of loans. The removal of the interest rate ceilings is expected to increase competition on loan pricing.

A uniform regulatory framework for the microfinance sector will ensure a level playing field among all regulated players.

Capping the borrowers’ indebtedness at 50% of household income may impact the overall credit growth in the microfinance industry. With a cap on the fixed obligation to income ratio at 50%, the maximum permissible indebtedness of rural microfinance borrowers could be lower than the current levels

The RBI’s recommendations can ensure responsible lending in the microfinance space. A misuse of flexible pricing guidelines for NBFC-MFIs may not be possible because the pricing of loans would be market-driven on the back of competitions.

Bandhan Bank and Ujjivan Small Finance Bank may be the hardest hit, given the high ticket size of their loans. Unlike in the past when no more than two MFIs could lend to the same borrower, this limit will now apply to all lenders.

With the onus of assessment of household income shifting to lenders, they will need a board-approved plan for the same. The stipulation for the assessment of household income may lead to an increase in borrowing costs for customers. Each NBFC-MFI would need to adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances.

The lifting of the interest rate cap would benefit MFIs as their margins will not be under pressure, but put the onus of fair pricing on MFIs

Key proposals

The key proposals of ”Consultative Document on Regulation of Microfinance” include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, and a board-approved policy for household income assessment.

It also suggests no requirement of collateral and greater flexibility of repayment frequency for all microfinance loans.

As per the consultative paper by the RBI, a microfinance loan would mean collateral-free lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh at urban and semi-urban centres.

The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans. They will also be required to disclose pricing related information in a standard simplified fact-sheet.

There will be no prepayment penalty, said the consultative paper on which the RBI has invited comments from the stakeholders by July 31.



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