Micro lenders' net interest margins to face pressure over competition: KPMG

Net interest margins (NIMs) of micro-finance institutions (MFIs) would be under considerable pressure as competition rises in the sector, a study by KPMG has said.

"As the competitive intensity for MFIs increase, the pressure on NIM will increase considerably. So, the need for the MFIs to focus on non-interest income/credit plus products becomes very important," it said.

The MFIs can additionally enhance penetration of insurance in general and life insurance sector with simple, contextual and small-ticket products, based on the needs of the segment, KPMG said in the report.

In the last three years, MFI players have grown their disbursements at a CAGR of almost 50 per cent, it said, adding, the potential was available in relatively underpenetrated regions of the north, east and central parts.

KPMG said the MFI sectors awaited parity in terms of restrictions related to lending when compared to small finance banks.

The entry of small finance banks had impacted the pricing, ticket sizes, product features and repayment behaviour, the study said.

Going forward, the need to evaluate the overall indebtedness of the borrower and households at the time of underwriting would be critical, given the exposure of this segment to multiple lending firms, the KPMG study noted.

This will impact the operations (including wage costs) of the MFIs, which primarily rely on income declaration and residence proofs of the borrowers, it added.