Microfinance gross loan portfolio jumps 18% in FY23; write-offs up by 7.7%: Report

Microfinance gross loan portfolio jumps 18% in FY23; write-offs up by 7.7%: Report

According to the latest quarterly report on microfinance lending by credit bureau Crif High Mark, the gross loan portfolio (GLP) or portfolio outstanding of the microfinance sector in India grew by 17.9% year-on-year (YoY) as of March 2023. The GLP increased from Rs 2.86 lakh crore in March 2022 to Rs 3.37 lakh crore in March 2023. On a quarter-on-quarter (QoQ) basis, the GLP grew by 6.6% from Rs 3.16 lakh crore in December 2022.

Regarding market share, non-banking financial company-microfinance institutions (NBFC-MFIs) continued to dominate the microfinance sector, accounting for 37.3% of the portfolio with Rs 1.26 lakh crore. Banks held a 33.1% share worth Rs 1.11 lakh crore, and small finance banks had a 16.6% share worth Rs 56,075 crore during the March quarter.

Compared to the previous year, the market share of NBFC-MFIs increased by 32.2%, banks saw a 3.6% increase, and small finance banks experienced a 14.5% increase in their shares.

These figures indicate microfinance’s continued growth and importance in providing credit and financial services to Micro, Small, and Medium Enterprises (MSMEs) in India. Microfinance plays a crucial role in enabling access to finance for individuals and businesses that may have limited access to traditional banking services.

According to Sanjeet Dawar, Managing Director of CRIF High Mark, the microfinance sector in rural markets saw significant growth, with a year-on-year increase of 22.3%. On the other hand, the urban markets experienced a growth rate of 11.4%. Dawar highlighted that the microfinance sector in India is rapidly expanding, providing access to formal credit for small borrowers. This growth is contributing to greater financial inclusion by enabling individuals and businesses to access financial services that were previously inaccessible to them.

The microfinance sector’s expansion in rural and urban areas reflects its positive impact on fostering financial inclusion in the country. Regarding portfolio quality, there have been improvements in the delinquency levels of the microfinance sector in India. The portfolio delinquent by over 30 days past due (DPD) decreased from 6% of the gross loan portfolio (GLP) in March of the previous year to 2.2% of GLP in March 2023. Similarly, the proportion of portfolio delinquent by over 90 DPD also improved from 2.7% in March 2022 to 1.1% in March 2023.

However, there has been a slight deterioration in the portfolio at risk by over 180 DPD, which increased to 9.1% in March 2023 compared to 8.4% in March of the previous year. It’s worth noting that on a quarter-on-quarter (QoQ) basis; there was an improvement from 10% in December 2022.

In addition to the delinquency levels, write-offs have also increased in the microfinance sector. Write-offs, which refer to loans deemed irrecoverable and removed from the books as losses, accounted for 4.8% of the GLP in March of the previous year and increased to 6.6% in December. By March 2023, the write-offs further rose to 7.7% of the GLP.

These figures indicate a mixed picture of portfolio quality within the microfinance sector. While there have been improvements in delinquency levels for shorter durations, the portfolio at risk by over 180 DPD has shown a slight deterioration. The increase in write-offs suggests a higher level of loan losses experienced by microfinance institutions.

It is essential to closely monitor the portfolio at risk and write-off levels in the microfinance sector. Efforts should be made to maintain the positive trends seen in shorter-term delinquencies while addressing the challenges posed by loans at risk for more extended periods. It is crucial for microfinance institutions to maintain robust credit assessment and risk management practices to ensure the sustainability and stability of the sector.

Despite these challenges, the microfinance sector continues to play a vital role in promoting financial inclusion and providing access to formal credit for small borrowers in India. According to a report by credit rating agency CareEdge in April, the microfinance sector in India is expected to continue its growth trajectory. The report projects a year-on-year (YoY) jump of around 25% in assets under management (AUM) for the current financial year. This growth is anticipated to be driven by steady disbursement growth and an improving macroeconomic environment.

The report suggests that the microfinance sector is poised to benefit from various factors. The steady disbursement growth indicates sustained demand for microfinance products and services. This indicates that more individuals and businesses are seeking access to credit through microfinance institutions.

Additionally, the improving macroeconomic environment plays a significant role in supporting the growth of the microfinance sector. Factors such as stable economic conditions, favorable policy measures, and government initiatives aimed at promoting financial inclusion can contribute to the sector’s expansion.

The projected 25% YoY jump in AUM highlights the positive outlook for the microfinance sector, indicating its continued importance in providing financial services to underserved segments of the population, including Micro, Small, and Medium Enterprises (MSMEs). The sector’s growth aligns with the broader goal of fostering financial inclusion and supporting economic development at the grassroots level.

It is important to note that while the report provides an optimistic outlook, various factors, including potential economic and regulatory changes, can influence the actual growth rate of the microfinance sector. Monitoring and addressing challenges related to portfolio quality, risk management, and regulatory compliance will be crucial for sustaining the sector’s growth in a responsible and sustainable manner. Nitin Purswani, the CEO of Medius AI, a company providing debt collection solutions to banks and non-banking financial companies (NBFCs), highlights the critical role of financial inclusion in driving the growth of India’s microfinance sector.

Purswani emphasizes that the sector’s expansion is primarily fueled by the need to provide access to financial services in underserved rural and remote areas that lack traditional banking infrastructure.
Microfinance plays a crucial role in addressing the financial needs of individuals and businesses in these areas, enabling them to access micro-loans that are otherwise unavailable through traditional banking channels. By offering accessible micro-loans, the microfinance sector empowers numerous individuals, enabling them to escape the cycle of poverty. This empowerment, in turn, leads to the growth of small-scale entrepreneurship and revitalizes local economies.

The statement underscores how microfinance institutions have become a catalyst for economic development, particularly in rural and remote areas. By providing financial resources and support to individuals who may not have access to formal credit, microfinance contributes to poverty alleviation and helps in creating sustainable livelihoods.

Companies like Medius AI, which specialize in debt collection solutions, are part of the ecosystem supporting the microfinance sector. Their services help banks and NBFCs ensure efficient recovery of loans, maintaining the financial health of these institutions and enabling them to continue providing microfinance services to underserved communities.

The quote from Nitin Purswani highlights the transformative impact of microfinance on individuals and communities, emphasizing its contribution to financial inclusion, entrepreneurship, and economic growth. The microfinance sector’s growth is expected to continue addressing the imperative need for accessible financial services, further empowering individuals and fostering inclusive economic development in India.

According to CareEdge, the credit rating agency, asset quality pressure in the microfinance sector is expected to ease in the coming years. One of the contributing factors to this improvement is the decrease in the restructured portfolio. As the number of restructured loans reduces, it is anticipated that the overall asset quality will strengthen.

Furthermore, the gross non-performing asset (GNPA) ratio, which indicates the proportion of non-performing assets in relation to the total loan portfolio, is expected to decrease. CareEdge projects that the GNPA ratio will decrease from an expected 3.5% by the end of fiscal year 2023 to 3% by the end of fiscal year 2024.

While there is an expectation for an improvement in asset quality, it is important to note that the GNPA ratio will still be higher compared to the pre-Covid levels. This suggests that the sector is still dealing with the impact of the Covid-19 pandemic on loan repayment and asset quality.

The projected improvement in asset quality indicates a positive trend for the microfinance sector. As the economy recovers and borrowers’ financial situations stabilize, the ability to repay loans is expected to improve, leading to a decline in non-performing assets. However, it will take some time to fully recover and return to the pre-pandemic levels.

Monitoring asset quality and implementing effective risk management practices will be crucial for microfinance institutions to maintain stability and sustainable growth. By maintaining a balanced approach to lending, focusing on credit assessment, and closely managing repayment behavior, microfinance institutions can mitigate the risk of asset quality deterioration and maintain the sector’s resilience.

Overall, the anticipated easing of asset quality pressure and the projected decrease in the GNPA ratio demonstrate positive prospects for the microfinance sector. As the sector adapts to the changing landscape and implements appropriate measures, it can continue to support financial inclusion and contribute to the economic growth and empowerment of underserved communities in India.