Growth in the microfinance sector has tapered and defaults are on the rise. The slowdown in the sector is being attributed to the recent spate of defaults in Assam, along with other factors like natural calamities, over-lending and liquidity issues in the non-banking finance sector.
According to the latest report from CRIF High Mark, the credit bureau for the microfinance segment, Q2 of FY 2019-20 witnessed overall higher delinquency levels than in Q1. PAR 1-30 (portfolio at risk open for loans overdue between one and 30 days) was contained at one per cent during the quarter ended June 2019 after rising to 2.9 per cent in the quarter ended September 2018. However, it once again breached the one-per cent mark, and was reported at 1.3 per cent at the end of Q2 this financial year. What is more worrisome is that PAR 180+ (portfolio at risk open for loans overdue for 180 days) stands high at 4.5 per cent. This is 0.2 per cent higher than the previous quarter, though 1 per cent lower than the same period last year.
Last year, much of the accretion on non-performing assets (NPAs) was on account of debt-waiver schemes announced by state governments ahead of the general elections.
In Assam, protests against microfinance organisations are being led by one Jagrata Mahila Suraksha Samaj, which claims microfinance lending is responsible for suicides in the state. According to data from Microfinance Institution Network (MFIN), the gross loan portfolio of MFIs in Assam is about Rs 2,500 crore.
“We are witnessing slightly higher delinquencies, particularly in areas that were struck by natural calamities. Then there is news of some problems in Assam. There are markets in which a number of entities are competing against each other, leading to spikes in delinquencies. The industry is exercising caution in terms of growth. While they are going for outreach, they are avoiding loans with large ticket sizes,” said R Baskar Babu, MD & CEO of Suryoday Small Finance Bank.
The GLP (gross loan portfolio) of the sector as of September 2019 grew at a pace of 1.35 per cent quarter-on-quarter, slower than the previous quarter (2.7 per cent) and the same period last year (6.8 per cent), the CRIF High Mark report says.
“The impact of slowdown is likely to be visible with a lag. Portfolio growth in H1 of this financial year has generally been flat, compared with Q4 of the previous fiscal,” Babu said.
Notably, banks are now the dominant players in the MFI segment. In September 2019, the share of GLP for banks rose to 40.8 per cent, while that of NBFC MFIs was down to about 30 per cent. Banks have reported a high Y-o-Y growth of 68 per cent, as of September 2019. They dominate urban and rural geographies both, in volume and value as of Q2 of FY 2019-20.
Aggressive lending by banks has raised concerns in the microfinance segment.
The present Reserve Bank of India (RBI) regulations governing over-indebtedness in microlending applies only to NBFCs-MFIs and not-for-profit MFIs. According to RBI norms, the total loan amount to a single borrower should not exceed Rs 60,000 in the first cycle and Rs 1,00,000 in subsequent cycles, with no more than two microfinance lenders taking exposure at a time. However, since these rules don't apply to banks, there has been an oversupply in some geographies, said Manoj Kumar Nambiar, managing director, Arohan.
“The large number of natural calamities in the state has led to an overall slowdown in lending and a rise in delinquencies. Secondly, there is an issue of oversupply in some areas. In Assam, we see some problems due to this reason. Lastly, small and medium MFIs have been hit by tight liquidity, as they are mostly dependent on NBFCs for lending,” said Nambiar.