MFIs lose lending space to banks

The share of NBFC-MFIs came down to 31% at the end June, according to the Microfinance Institution Network

When Bharat Financial Inclusion, earlier known as SKS, informed the stock exchanges last month that it was in talks with IndusInd Bank on a merger, the share prices of Bharat Financial hit a 52-week high and touched Rs 979.

For Bharat Financial shareholders, it brought hope in the midst of uncertainty surrounding the economic viability of standalone microfinance firms.

The possible merger of the largest microfinance firm in India with a bank ties in with the rising clout of banks in microfinance and its loss of its monopoly.

According to industry insiders, this could spur many more mergers.

Till about three years ago, non-banking finance company microfinance institutions (NBFC-MFIs) accounted for nearly 75 per cent of the market share in microcredit, with banks having less than 25 per cent.

At the end of June this year, banks had close to 36 per cent and small finance banks had 27 per cent.
 

Thus, banks and small finance banks now command 63 per cent of the market.

The share of NBFC-MFIs came down to 31 per cent at the end June, according to the Microfinance Institution Network (MFIN).

Banks have become aggressive lenders in microlending, with Bandhan graduating into a bank and another eight MFIs turning into small finance banks, and therefore, a large chunk of microfinance has migrated to the banking sector.

In addition, a number of factors have contributed to the shrinking of space for microfinance firms. One of the biggest blows for MFIs came with demonetisation and the debt-waiver scheme. 

Many regular borrowers in states such as Uttar Pradesh, Maharashtra, Madhya Pradesh, Uttarakhand, and Karnataka have stopped repayments, and the repayment rate came down from about 99 per cent to around 84 per cent.

According to the latest data available from the MFIN, at the end of the first quarter of FY18, for NBFC-MFIs the portfolio at risk (PAR) at more than 30 days is still high at 7.46 per cent, against 0.32 per cent in the same quarter in 2016-17.

“The MFI landscape has seen dramatic changes in the recent past. As the market grows, MFIs need to reorient their business methodologies. For example, they should be more geared up for individual lending rather than group lending. There is also a question of leadership. Till recently, the industry had many stalwarts, but most of them have now shifted to the banking sector. With a shrinking share in aggregate lending, MFIs are no longer getting the same amount of regulatory attention from policymakers they used to get earlier,” says Alok Prasad, industry expert and former chief executive officer (CEO) of the MFIN.

This apart, the risk of over-indebtedness remains high in microfinance. In view of the risk of multiple lending, the MFIN came up with a voluntary code of conduct for microlending, applicable also to small finance banks and universal banks. Micro-lending under joint liability groups has been capped at Rs 60,000 per customer and the number of lenders has been fixed at three per customer.

“Microfinance entities lend to a very vulnerable section of society. Multiple sources lending in this sector has opened up micro-credit avenues for clients and ensured ease of credit for low-income households. However, there is also a need to protect microfinance borrowers from over indebtedness and safeguard their interests,” according to Ratna Vishwanathan, CEO, MFIN. According to Viswanathan, so far about four banks have come on board to follow the code of conduct. 

MFIs are now trying to reinvent themselves through technological innovation or diversifying into newer fields. For example, Delhi-based Satin Care Credit Network is now looking to diversify into individual lending in housing. The MFI is planning to apply for a housing finance company licence under a subsidiary, according to HP Singh, chairman, Satin Care Credit Network.
 

Another MFI, Arohan, is looking to use technology for micro-lending through a tie-up with a payment bank.