First time in 4 years, MFIs overtake banks in microlending with 40% share

After a gap of four years, standalone MFIs overtook banks in microlending in 2022-23 with a 40 per cent share of loans in the country, up from 35 per cent in the last year, according to an analysis.

On the back of recovery after being hit hard during the pandemic when collections and disbursals plunged, MFIs have clawed back from 32 per cent share in FY20, which declined further to 31 per cent in FY21 before improving to 35 per cent in FY22.

As of March 2023, MFIs held a 40 per cent share of the overall microfinance loans, registering a 37 per cent growth, compared to banks' 34 per cent, down 600 bps from the previous fiscal, Care Ratings said in a note on Wednesday.

Almost all banks have an MFI book as part of meeting their priority lending targets.

Banks controlled 34 per cent of the industry's Assets Under Management (AUM) in FY23 -- down from 40 per cent in FY20 and FY22. Their share had peaked at 44 per cent in FY21.

The microfinance industry grew by 37 per cent in FY23 due to favourable macroeconomic climate and renewed demand, leading to higher disbursements.

Consequently, standalone MFIs have surpassed banks in the overall microfinancing landscape, constituting around 40 per cent of the total outstanding microfinance loans as of March 2023, compared to 34 per cent for banks, Care Ratings said Wednesday in a note.

The report, penned by Care Ratings Senior Director Sanjay Aggarwal, said the agency anticipates the growth momentum to continue in the current fiscal, though it could slow to 28 per cent.

The report, however, warned of increasing customer debts, rising average ticket size and a gradual shift from the joint liability group model to individual loans, which could pose the risk of overleveraging for the industry.

Also, given the inherent nature of the MFI asset class, these lenders are prone to event-based risks such as political, geographical uncertainties and are susceptible to natural calamities, Care Ratings said.

The removal of the lending rate cap by the Reserve Bank of India has enabled MFIs to engage in risk-based pricing, which has boosted their net interest margins (NIMs) and, in turn, increased returns on total assets.

Credit costs have also declined from their peak in FY21, but remain higher than pre-pandemic levels, with a portion of the restructured book slipping into NPAs, it said.

The agency expects NIMs to continue improving to 3.8 per cent in FY24, aided by controlled credit costs of about 2.5 per cent.

MFIs have raised around Rs 3,000 crore in equity in FY23, compared to around Rs 1,500 crore and Rs 1,430 crore in FY21 and FY22, respectively, indicating a renewed interest from investors.

Bihar, Tamil Nadu, Uttar Pradesh, Karnataka, and West Bengal remain the top five states in terms of MFIs' AUM with Bihar leading the sector with about 15 per cent market share in the country.