The Indian micro loan sector with a size of around Rs. 1.7 trillion as on March 31, 2017, has grown at a healthy compounded annual growth rate of 32% during FY2013-2016. Of this NBFC-MFIs, Small Finance Banks (SFBs) and Banks (excluding the SHG Bank linkage programme) had grown at a much faster pace of 57%. However, the growth trajectory for NBFC-MFIs/SFBs and banks changed post-demonetisation with the portfolio growth slowing down from 72% in FY2016 to 29% in FY2017. According to an ICRA note, fresh disbursements slowed down substantially in H2FY2017, consequently, leading to their overall portfolio growth shrinking considerably.
Rohit Inamdar, Group Head Financial Sector Ratings, ICRA, said, ''Overall collection efficiencies[1] for the industry as a whole came down from around 99% before demonetisation to 82% in December 2016, and improved to around 85-88% till March 2017. There was further improvement in collection efficiencies in Q1FY2018 up to 92% in June 2017, largely driven by improved collections in the state of Uttar Pradesh and increased disbursements (including top-up loans) by many of the MFIs. Consequently, the 0 days past due delinquencies that had peaked to 23.6% in February 2017 improved to 19% in June 2017. However, further flows from softer buckets led to deterioration in 90 days past due delinquencies from 4.9% as on February 28, 2017 to 11% as on June 30, 2017''.
In the past, joint liability group (JLG) mechanism was considered to be a mitigant against the asset quality related concerns for the sector and the group members were willing to repay on each other's behalf in case of any membe's default. However, it has been observed that while group guarantee works well in case of temporary cash flow mismatches, in events of prolonged stress situations with large number of borrowers under stress the members may not be able to honour the group guarantee. Post-demonetisation, ICRA visited over 600 MFI centres of 19 MFIs across 8 states covering over 6000 borrowers. Weakened group linkage with borrowers not honouring the joint liability mechanism in case of default by fellow group members was observed. Instances of non-paying group members discouraging paying members were also highlighted by some field staff. Further, for deciding eligibility of borrowers for fresh loans, their own track record of payment is being considered by MFIs and the fact that the member has not honoured the group guarantee is being ignored. Further, key drivers for delinquent borrowers to become regular have been the need for fresh loans and rejections in credit bureaus. ICRA also noticed some lenders offering top-up loans/netting off delinquent amount outstanding and offering fresh loans to customers indicating some ever-greening of loans.
Despite a dip in collection efficiencies, MFIs/SFBs were able to make repayments to lenders as per schedule as most of them continued to receive incremental funding from lenders. Further MFIs have positive asset liability mismatch therefore collections received were sufficient to service their debt, even at lower collection efficiencies. While most NBFC-MFIs had some debt with strict financial and operational covenants (such as 30+ dpd not to exceed beyond a certain percentage), whose breach can potentially lead to acceleration of the debt, ICRA is not aware of any lender exercising the option to accelerate their debt during the crisis. All these factors together supported the liquidity profile of MFIs.
MFIs and SFBs raised an aggregate of Rs. 47.13 billion of equity capital in FY2017, of which Rs 11.55 billion was raised after demonetisation, indicating continued support from equity investors. Consequently, the entities continued to report good capitalisation indicators overall with a net worth in relation to managed advances increasing from 16% as on March 31, 2016 to 25% as on March 31, 2017.
As for growth outlook, portfolio growth for the sector (MFI, SFBs and banks) is likely to be 25-30% in FY2018. Further, MFIs are likely to focus on lower branch addition and servicing of existing clients rather than adding new clients.
''Based on the present recovery trends from delinquent buckets, 70-75% of the portfolio delinquent more than 90 days is likely to be written off, therefore mean credit costs for the industry as a whole are likely to be in the range of 5.5-8% for FY2018. The extent of impact will differ across MFIs based on share of portfolio in impacted geographies, their client connect, field discipline, collection frequency, IT systems and appraisal mechanisms and pro-activeness to curtail operations in overheated areas,'' said Inamdar. Credit costs could vary from 2% for entities which were impacted to a limited extent because of demonetization to around 18% for entities which had greater impact. Further, concerns on over-leveraging, dilution of discipline, politically sensitive nature of clients as well as various states announcing farm loan waivers, have increased therefore, collection efficiencies are unlikely to come back to pre-demonetisation levels of over 99% in the medium term. The steady state credit costs are likely to be 2.5-3.5%.
Operating expenses for MFIs are likely to increase owing to investments to be made on information technology and collections infrastructure by most players. Given our estimates of credit costs of 5.5-8%, and interest reversals on delinquent portfolio, overall net interest margins are likely to decline by 0.8-1% leading to negative return on equity for the sector for FY2018.
With most MFIs and SFBs availing the RBI dispensation till March 2017 for asset classification, they will need to provide for the delinquent portfolio from Q1FY2018 which is likely to impact their capitalisation indicators. ''The 90 days past due delinquencies in relation to net worth of the sector overall stood at 45% as on June 30, 2017 indicating a significant pressure on capitalisation indicators if the delinquent portfolio is provided for in FY2018. Given their higher expected credit costs for FY2018, ICRA estimates that MFIs and SFBs together would need external capital of Rs. 90-110 billion for growing at a CAGR of 25-30% over the next three years, while maintaining a leverage at around 5 times. Therefore, present leveraging levels, expected credit losses and ability to raise capital will be a critical distinguishing factors for MFIs in the near to medium term,'' Inamdar added.
