SIDBI keen to expand exposure in MFI industry as it posts 25% annual growth

In the backdrop of the domestic microfinance industry posting an annual growth of about 25%, the Small Industries Development Bank of India (SIDBI) is keen to increase exposure in the sector.

Till June 30, 2018, SIDBI had augmented the capacity of 100 microfinance institutions (MFI) in the country and provided cumulative loans worth Rs 175 billion, thus reaching 38 million beneficiaries.

“SIDBI has been a pioneer in the micro-finance space by providing financial assistance in the form of equity/quasi-equity, term loans and grant support to MFIs, while also advocating and implementing various ‘responsible’ lending practices,” SIDBI CMD Mohammed Mustafa has said.

He added that as an industry leader, SIDBI has been working towards enhancing corporate governance and operational efficiency of MFIs and enabling smooth flow of adequate credit to the microfinance sector through various interventions.

By the end of first quarter (Apr-June 2018), the microfinance industry had a loan portfolio of Rs 1.48 trillion with banks having the largest share of 39%, followed by small finance banks (SFB) 21%, non-banking financial companies (NBFC)-MFIs (pure-play) 32% and NBFCs 7%.

Pure-play MFIs have been a significant contributor to the growth in microfinance lending and have posted double the growth rate compared to traditional banks in the last fiscal.

However, Mustafa cautioned that pure-play MFIs were facing multiple challenges, since the competitor landscape had radically changed. While these mostly ‘erstwhile MFIs’ have been refocusing their portfolios towards secured products, MFI has been their core business.

“It would not be long before these SFBs reverts to focusing onto the MFI. If they are successful in raising a healthy deposit base, this could dramatically lower their offered yields and threaten pure-play MFI economics. If the current liquidity crisis goes on for a while, pure-play MFIs will face a dual compression on their net interest margins (NIM),” he added.

Besides, demonetisation had also exposed ‘structural’ issues in the sector. Mustafa said geographic concentration had built up in microfinance lending with the top 10 states accounting for 84% of the gross loan portfolio.

“The industry needs to strategically evaluate this distribution to minimise concentration risk. Currently, the eastern region dominates the market with 35% of the total gross loan portfolio (GLP), followed by the southern, western and northern regions at 26%, 14% and 15% respectively. Tamil Nadu continues to be the largest market with 15% share,” he informed.

However, he added that MFIs had always innovated to recover from unforeseen challenges like the global financial crisis and Andhra crisis over repayments. He further said that while alternate forms of lending in the formal sector like pay-day loans, offered by fintech companies, were gaining momentum, fintech companies were exploring mobile-based lending solutions in local languages to attract customers.