The Brief: The Rise Of Micro Credit NBFCs

WITH BANKS FOCUSING all their attention on retail credit, given the rising credit deposit ratio, it’s the non-bank finance companies (NBFCs) that have widened their lead over banks in the microfinance segment. After first overtaking banks in terms of market share in FY23, the winning streak for 91 NBFC MFIs has continued well into the year with their share rising to a loan outstanding of ₹1.56 lakh crore, accounting for 39.1% of the overall industry portfolio. Banks (13) now have the second-largest share in micro-credit with a total loan outstanding of ₹1.34 lakh crore.

According to the Microfinance Industry Network (MFIN), an industry association and also an RBI-recognised self-regulatory organisation, the gross microfinance loan portfolio stood at ₹3,99,442 crore as of December 2023, serving 7.4 crore unique borrowers with 14.6 crore loan accounts. In fact, microfinance loan disbursals during Q3FY24 increased to ₹78,584 crore, compared with ₹77,877 crore in corresponding quarter last fiscal. The number of loans disbursed, though, fell during the quarter to 1.66 crore, against 1.89 crore a year-ago.

The industry has been able to put the worst behind, says Alok Misra, CEO and director, MFIN. “Microfinance operations added more than one crore unique clients over the last financial year to its fold even as portfolio delinquency has reached pre-Covid levels, which indicates improving health of the microfinance portfolio,” mentions Misra.

Interestingly, the portfolio that was traditionally skewed towards east and northeast has slipped to the second position at 31.06%, while south India has emerged as the largest contributor at 31.14% with Telangana and Andhra Pradesh driving growth, even as West Bengal has seen a slowdown.

Over the past 12 months, active loan accounts increased 15.9% from 12.6 crore as of December 2022. In terms of regional distribution of gross loan portfolio, east & northeast and south account for 62% of the total portfolio. Bihar remains the largest state by portfolio outstanding followed by Tamil Nadu and Uttar Pradesh. As of December 2023, NBFC-MFIs, on an aggregated basis, have a network of 19,712 branches with 1,75,806 employees. Average loan amount disbursed per account in Q3 was ₹45,705, 8.2% higher in comparison to the same quarter of the previous fiscal. However, to fund the growth, NBFC-MFIs saw a rise in debt mobilisation, over 57% higher, at ₹21,847 crore, even as equity grew nearly 38% to ₹31,825 crore during the same period.

The MFI sector has witnessed various headwinds, including the pandemic, since FY10, but overcame the challenges by growing at 16x over FY10 to FY22 in terms of gross loan portfolio. According to a report by ICICI Securities, there is ample scope for MFI loans to expand compared to other retail loans such as credit cards, housing and auto. While MFI loans have grown at a CAGR of 29% over FY15-22, in contrast, credit cards have grown at a CAGR of 25% followed by housing at 14% and auto loan at 7% during the same period. With an increase in the eligibility criteria of annual income of households, the customer base is likely to increase substantially, mentions the report. As per Crisil Research, underpenetrated states such as Uttar Pradesh, Gujarat, Uttarakhand and Manipur are seen driving future growth along with some traction in moderately penetrated states of Rajasthan, Maharashtra and Madhya Pradesh.

Approximately 47% of the country’s GDP is contributed by rural areas, yet they only receive about 10% of overall credit distribution, highlighting a significant market potential for microfinance institutions focusing on rural regions. The Reserve Bank of India recently increased the income threshold for households to qualify for microloans up to ₹3 lakh annually, up from the previous limits of ₹1.25 lakh in rural areas and ₹2 lakh in urban areas. MFIN estimates this adjustment will benefit around 70% of rural households, facilitating greater market penetration for MFIs and the opportunity to explore newer markets.

The growth in ticket size is also visible with the industry wide average loan amount nearly doubling from ₹23,000 in FY18 to ₹45,705 in FY24 (December 2023), a growth rate of 98.72%. This growth in the average loan size is anticipated to partially support the expansion of microfinance institutions’ loan portfolios.

The improvement in the growth in AUM has been underscored by a reduction in stressed assets (gross non-performing assets or NPAs and restructured assets), which fell to 6% in December 2022 from a high of 13% in September 2021, to around 3% in FY23. NBFCs have addressed the challenges in their portfolios through a combination of write-offs and asset sales to asset reconstruction companies (ARCs). This approach, combined with the lower incidence of new defaults in recent loans, has effectively reduced their levels of stressed assets.

Following the removal of the 10% interest rate cap by the central bank, NBFC-MFIs have seen their net interest margins (NIMs) rise around 140-150 basis points. Given that most non-banks have a fixed-rate book and with funding costs at their peak, margins are expected to stay robust in the 10.5-11% range. Not surprising that profitability, measured by the return on managed assets, is projected to surpass 3% in FY24, up from 1.5-2.0% in FY23 and about 1% in FY21 and FY22.