A woman holds the loan she has received, a stack of rupee bills, during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)

Microfinance Disbursements Hold Up Despite Tight Liquidity: ICRA

India’s microlenders continued to disburse loans at the same pace as over the past few quarters despite tight liquidity conditions, which have forced some non-bank lenders to cut back lending.

For the 12 months till December 2018, the industry grew 28 percent to a size of Rs 2.4 lakh crore. Growth was marginally higher than the 26 percent in the 12 months till December 2017. While year-on-year growth in the third quarter was elevated at 44 percent because of lower-than-trend disbursements in the third quarter last year, growth is expected to normalise to near 20 percent in the fourth quarter, the rating agency said.

While growth rates remained strong, ICRA said smaller microfinance institutions with assets under management of less than Rs 500 crore faced challenges in raising funds. These firms resorted to increased securitisation to meet liquidity needs.

Incremental funding requirement for the MFIs is likely to remain a challenge given the significant growth aspirations (and even for servicing the existing client requirements). At the same time, the cost of funds for the MFIs shall remain at elevated levels till the systemic liquidity improves.
ICRA Release
Microfinance Disbursements Hold Up Despite Tight Liquidity: ICRA

Asset Quality

The microfinance industry, which saw some deterioration in asset quality in the months after demonetisation, has seen delinquencies stabilise.

The share of loans overdue by fewer than 90 days for MFIs and small finance banks fell to 1.5 percent in the quarter ended December 2018, as compared to 7.6 percent in the quarter ended June 2017. Excluding SFBs, the default rates were lower.

The percentage of non-performing loans due by over 90 days also declined from 11.6 percent in the quarter ended June 2017 to 3.9 percent in the quarter ended December 2018.

“Write-offs, some recoveries in affected areas, portfolio growth and good collections on new portfolio supported asset quality,” said ICRA.

Microfinance Disbursements Hold Up Despite Tight Liquidity: ICRA

Red Flags

While asset quality is stable, ICRA has raised certain red flags. Among them is a sharp jump in ticket size and a slowdown in addition of new clients.

Data provided by ICRA showed that the share of loans of more than Rs 25,000 jumped to 83.3 percent as of December 2018 compared to 45.8 percent in March 2018.

A reversal was observed in the trend with rise in ticket size outpacing the growth in client base. While MFIs continue to expand their reach and add new clients, in the post-demonetisation period, greater focus has been on client retention (by offering higher ticket sizes) and eliminating delinquent clients, which has slowed down the pace of client growth for the sector.
Supreeta Nijjar, Sector Head -Financial Sector Ratings, ICRA
Microfinance Disbursements Hold Up Despite Tight Liquidity: ICRA

The rating agency also pointed to the increase in longer tenure loans.

Loans with a tenure of more than one year accounted for 80 percent of the portfolio as of December 2018 compared to 67 percent in March 2018.