Microfinance market could grow three-fold in 3-5 yrs: ICRA

However, it is vulnerable to political risks, rising competitive pressure, expansion to newer geographies, marginal borrower profile and high attrition

Given the drive for financial inclusion, the micro-finance market, which essentially civers small-ticket loans for under-banked in India, has potential to grow over three-fold to Rs 3.4 lakh crore over the next five years, according to rating agency ICRA.

At present, the market size is Rs 1.1 lakh crore as of September 30, 2015, covered by Self-Help Group Bank Linkage Programme, Microfinance Institutions (MFIs) and Bandhan Bank.

The segment has maintained good asset quality. However, it remains vulnerable to political risks, increase in competitive pressures, expansion to newer geographies, marginal borrower profile and high employee attrition rate (about 25 per cent) across the industry, ICRA said.

Maintaining lending discipline, wider coverage under credit bureaus and tactful resolution of issues by stakeholders are to ensure asset quality in future.

In order to grow further, microfinance entities would need backing of capital and resources. MFIs would need Rs 900-2,200 crore (26-67 per cent of the existing net worth) to achieve a compounded annual growth rate (CAGR) of 30-40% over the next three years, ICRA said. The estimate excludes Bandhan and eight entities converting to Small Finance Bank.

Overall equity infusion in MFIs increased by 231 per cent from around Rs 530 crore in 2013-14 to Rs.1,740 crore in 2014-15.

The fund flow to the sector continues remains good, funding costs witnessed moderation of 100-150 bps, some increase in share of non-convertible debentures in overall funding mix.

On the debt side, MFIs have been able to diversify their funding profile with a large number of MFIs raising funds from the debt market and the credit flow from banks improving.