MFIs' bad loans may triple: Crisil

Bad assets of microfinance institutions (MFIs) are expected to triple to 1.5 per cent by March 2010 compared to the March 2009 level due to the economic slowdown which has hit the repayment capability of small borrowers, according to credit rating and research agency Crisil.

The agency expects bad assets to rise to 1.5 per cent of total advances by the end of the financial year. However, the deterioration in asset quality was still not at the levels seen one-and-half-years ago, said Roopa Kudva, managing director and CEO, Crisil. MFIs’ asset quality was healthier than those of other financial players in India, she added.

The deterioration in asset quality was timed with the downturn in economic activity, said the rating agency chief. Most of MFI customers belong to vulnerable sections. They are impacted the most and almost immediately due to economic dislocation.

She was speaking at the release of Crisil’s publication, Top 50 Microfinance Institutions in India, in Mumbai earlier. The publication presents an overview of the leading players in the Indian MFI space.

The rater expects the number of borrowers serviced by MFIs to increase from 21 million in March 2009 to 35 million by March 2011. “Demand will continue to outstrip supply for a long time to come. We estimate the demand for funds in the MFI sector to be about $60 billion (around Rs 2,90,000 crore), whereas the actual credit disbursals are only about $6 billion. Only 10 per cent of the market has been penetrated,” said Ramraj Pai, director, Crisil Ratings.

Banks, especially private sector lenders, account for a bulk of funding to MFIs. Private sector banks have a 45-50 per cent share of MFI funding, while that of public sector banks is much lower at 15-20 per cent.

“There is a large scope for public sector banks to increase there funding to MFIs,” Pai said. There was also a need to find alternative sources of funding since banks were the only major source of funds to MFI, he added.