The risk of over-leveraging in the microfinance sector has increased owing to the changing landscape of the sector, varying interpretation of the RBI guidelines as well as some gaps in the credit bureau data, said credit rating agency Icra on Tuesday.
Icra said in a statement that an analysis of the portfolio of micro finance institutions (MFIs) reveals that the ticket sizes and loan tenures are rising.
An Icra study of over 35 MFIs and small finance banks (SFBs) showed that around 12% of the portfolio was at ticket sizes greater than ₹40,000 as of December 2018.
“If we were to apply a factor here, assuming that 30-40% of these borrowers had multiple loans then around 5-6% of the portfolio could be at ticket sizes greater than ₹80,000 (higher than what is prescribed by MFINs in the mutually agreed code of conduct)," said Icra.
The credit rating agency said that the domestic microfinance sector has registered a 28% growth during the 12 months ended December 2018 and has emerged unscathed even as the liquidity squeeze post September 2018 severely curtailed growth for the non-banking financial companies (NBFCs). Consequently, the overall micro loan market size was ₹2.37 lakh crore as on 31 December, 2018.
Supreeta Nijjar, vice-president and sector head, financial sector ratings, Icra said that while the industry is likely to grow at 20-22% in the current fiscal, there is need for the MFIs to do a more involved and thorough credit assessment of the debt repayment capacity of the borrower.
“Nevertheless, the segment remains vulnerable to income shocks, political interference, and event risks. Accordingly, Icra expects the credit costs for the sector to remain volatile with a mean level of 1.5-2% annualized," said Nijjar.
She added that while overall pace of growth was good, in the nine months of FY19, 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," said Nijjar.
The Icra report added that investors have continued to support the industry with equity infusion of around ₹4,350 crore in FY19, up from ₹4,100 crore in FY18. However, more than 90% of the capital raised in FY2019 was by the MFIs with AUMs of greater than ₹1,000 crore.
Given their growth targets of 25-30% per annum over the next three years, Icra said that MFIs and the SFBs together would need an external capital of ₹3,500-4,700 crore during this period.