NBFC-MFIs overtake commercial banks in micro loan market share in Q2

Non-banking financial companies (NBFCs) working as micro finance institutions (NBFC-MFIs) overtook commercial banks in terms of market share in micro loans in the second quarter of financial year 2022-23 (Q2FY23).

To sustain this lead, NBFC-MFIs will need to maintain a year-on-year (YoY) growth rate of over 25 per cent in disbursements, ensure robust underwriting and quality services, said MFI industry executives and analysts.

According to Sa-Dhan, an association of MFIs, the NBFC-MFI market share has dominated the sector for the first time in years with a share of 37.53 per cent, while banks have slipped to second position with a share of 36.18 per cent.

Sachin Sachdeva, vice president for financial sector ratings at ICRA, said this reflected the healthy growth in disbursements and outstanding loan book of NBFC-MFIs. Nevertheless, they have deeper relations with banks for co-lending and selling asset pools to banks for the latter’s priority sector targets, and this can alter the market share. NBFC-MFIs need to keep disbursements high to sustain market share gains, he said.

Instead of taking NBFCs head on, banks might be actually be looking at co-lending arrangements and also buy micro-loan pools from NBFC-MFIs to meet priority sector norms, he said. In this way they are providing liquidity to finance companies, which are nimble and close to customers.

One reason for this shift in trend could be that banks faced challenges in managing this asset class, especially after the outbreak of the Covid-19 pandemic and the resultant lockdowns. Perhaps, this made them diversify and look at other asset classes like mortgages. These are secured and large in size, but margins may be low.

Devesh Sachdev, chairperson of the Microfinance Institution Network (MFIN), said microfinance businesses need flexibility and a grounded approach and their cost structure is different. For them, this is the core business and they have been more focussed and resilient in the face of the pandemic.

They will sustain an edge as the top 10 NBFC-MFIs were clocking over 25 per cent YoY growth. They have sound capital and asset quality profiles with strong loan underwriting, monitoring and recovery mechanisms in place, said Sachdev, who is also managing director and chief executive officer of Fusion Micro Finance.

As a consequence, investors are ready to back them with fresh equity capital. There is no dearth of capital inflows, he said.

Jiji Mammen, executive director and chief executive officer of Sa-Dhan, said investors were probably adopting a wait and watch approach in light of the uncertain macroeconomic situation. India’s growth story will make investors pump more capital into the MFI sector, he said.