MFI Industry – A timely intervention to avert future mishaps

5 Dec 2024 , 02:49 PM

MicroFinance Institutions (MFI) started in the 1990s in India by taking inspiration from the Grameen model of Prof. Mohammad Yunus in Bangladesh. MFI industry has helped India boost financial inclusion, self-sufficiency, stability, women’s entrepreneurship, financial literacy and digitization by serving the unserved over the years. Microfinance is a type of financial service that offers loans, credit, insurance, etc. to small-scale, low-income businesses and entrepreneurs. Presently, the Microfinance industry has over 100 regulated Banks, SFBs, NBFCs, and NBFC-MFIs to serve low-income individuals in India.

The Gross loan portfolio of the MFI industry in FY24 marked a 24.5% growth YoY to Rs. 4,33,697 crores. In Q3FY24 unsecured loans formed 9.3% of the total lending business across major banks in the country. This had inched up from 9.2% in Q2FY24. Resultant of these increases was shown in the stress books of several banks.

During FY17-24 the unsecured NBFC book grew at a CAGR of a staggering 32%. Despite the growth being off a low base it is yet double of the retail secured loans such as vehicle, gold, home and property loans during the same tenure. Another noteworthy suit of the recent shoot up in the NBFC loans is that the unsecured loans now form up 14% of the overall NBFC credit.

The growth mentioned above was partially fuelled by non-sustainable methods. Lapses in several measures across the industry have come to light. Companies pressured by steady competition across the industry were pushing growth by not adhering to the norms set out in terms of KYC or interest rates amongst others.

RBI – Timely intervention
Earmarking all the above points and the inherent risk accompanied with unsecured loans, encouraged RBI as well as MFIN to take corrective measures to curb unscrupulous methods to grow AUM by several MFI players and ensure sustainable measures are taken to avoid the formation of any sort of bubble which could hurt the financial health of the country in the future. We respect RBI’s foresight and prudence in governance and ensuring stable and strong financial health of our institutions.

Measures taken by RBI

• To ensure this RBI first cracked down on bank lending to NBFCs (Majority share of NBFCs borrowings are from banks) by increasing the RWA for such loans. This resulted in higher interest loans to NBFCs in an already increasing interest rate environment and discouraged banks from taking further exposure to NBFCs in totality.
• In order to ensure curbing of the rolling loans within MFI, the RBI directed the MFIs to stop the practice of netting off loans. The practice of netting off was resulting in an opaque picture in terms of asset quality as well as growth in loan book and customer base.
• Further with specifics drawn to the unsecured and MFI lending space, RBI took directive actions against a few of the existing MFI players (likes of Asirvad Microfinance, Navi Financial services, etc.) by banning further disbursement of loans. Such drastic steps were taken in light due to lack of discipline followed by these companies in terms of KYC norms as well as interest rate charges.

Following the actions of the RBI, MFIN too took on corrective measures to curb the highly unsustainable growth rate. MFIN “laid down the law” by restricting incremental lending to customers:

• That have 3 outstanding loans vs earlier 4.
• Total indebtedness of up to Rs. 2,00,000 including unsecured retail loans vs only MFI loans earlier.
• Up to 60 Days Past Due (DPD) delinquency vs earlier 90 days past due, and
• Additionally, to adhere to stricter KYC norms MFIN has also proposed to seed PAN card for 50% of MFI customers.

Impact – both short term and long term
The above justified and much needed actions by the regulatory bodies resulted in a slowdown in growth and downward pressure on bottom-line was felt across the industry. In turn causing a steep correction in the stock prices of several players within the MFI space.

MFIs have scaled back their growth reducing disbursements (by 2%-40% QoQ) and shrinking loan books (by around 0.2%-12% QoQ).

Bottom line pressure was largely felt due to deterioration of asset quality as the initiatives led to a clean-up in the books of the players. Net slippages increased by 1.3x-3.3x QoQ to 2.7%-16.1%). Accompanied with poor asset quality, weather conditions too led to a drop in collection efficiencies as well as a higher attrition (companies like Spandana Sphoorty) has in turn led to higher credit costs (increasing by 24bps-1,140bps QoQ to 2%-18.6%).

In conclusion, the changes that have been proposed and implemented by the regulatory bodies may seem extreme and even a bit harsh in the shorter term but these steps taken to solidifying the financial sector which should see a flow of benefits in the future.

These headwinds are expected to persist through the first half of FY26. It is reasonable to assume that companies with better access to capital will be in a stronger position to navigate this rough patch. We believe, companies who are able to navigate through these tough times will emerge as eventual winners in this space over the medium term. As investors, lets just wait and watch.

Ujwal Shah

Fund Manager – Equities

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Source:

https://timesofindia.indiatimes.com/business/india-business/nbfc-unsecured-loans-grow-twice-as-fast-as-retail-credit/articleshow/111179197.cms

https://www.careratings.com/uploads/newsfiles/1731407595_MFI%20Article-FY25.pdf