One report says as many as 6% of 42 million MFI customers have borrowed from more than two lenders
While microfinance institutions (MFI) are yet to tide over the negative impact of demonetisation, intense competition and reports of over-borrowing have surfaced as the new grey areas in the sector.
At least two recent reports — one by CRIF High Mark, another by ICRA — point out to the fact that MFIs are showing signs of over-leveraging.
According to an internal CRIF High Mark, of about 42 million unique MFI customers, six per cent have loans with more than two lenders; a third of these customers have active loans with more than two NBFC-MFIs. Further, the report says, 70 per cent of such borrowers have three or more loans, and 17 per cent are even serving five loans at a time.
The ICRA report on MFIs points out, “The government’s demonetisation action of November 2016 has brought to the forefront several long-standing concerns in the sector, such as, high pace of growth, over-leveraging of borrowers, potential dilution in the rigour of the lending process and the possibility of loans being used for consumption rather than for income generation.”’
According to RBI guidelines, an individual borrower can take loans up to Rs one lakh from two MFIs at the most. As a self-regulatory organisation, MFIs have kept the ceiling at Rs 60,000.
Given the small proportion of over-indebtedness, MFIs are not in a face of crisis, but surely huge competition in the MFI space is quite perceptible.
Reasons leading to over-leveraging
Till about two decades back, micro-lending was a niche segment, with a few non-profit organisations and trusts dominating the market. Till 2010, the sector grew unregulated, when a crisis leading to large number of farmers’ suicide in Andhra Pradesh drew the attention of Reserve Bank of India. Stringent regulations sieved out the weaker institutions, but proved a blessing in disguise for bigger institutions, especially those outside Andhra Pradesh. The MFI industry emerged as a regulated and disciplined sector with strong financials. In 2014 when Bandhan got licence to start a bank, it was symbolic of reversal of fortunes for MFIs. Next year, out of ten licences for small finance banks, eight were grabbed by MFIs.
NBFC-MFIs saw a loan portfolio growth of around 84 per cent on a year-on-year basis till September 2016 at around Rs 55,254 crore.
Private banks too have became aggressive in micro-lending. From being nowhere in the microcredit space some years ago, banks now have market share of around 27 per cent in loan outstanding. Of the Rs 81,590 crore microfinance loan outstanding as on September 30, 2016, the share of banks was Rs 21,704 crore (excluding the MFI portfolio of Bandhan Bank at Rs 15,300 crore as on March 31, 2016).
Notably, even as net interest margins in banks are under stress, those in MFIs are still healthy at around 2-2.5 per cent.
In the next two months, all the ten SHGs will be operational, and the competition for micro-lending is expected to further intensify.
According to report by CRIF High Mark, top-up loans are potential sources of over-heating in the MFI market.
Top-up loans are defined by High Mark as loans less than or of a ticket size of Rs 10,000, and of a short tenure of nine months or less, with customers having at least two active loans. Notably, the third or fourth loan is often given by a bank of non-MFI entity, and a single MFI borrower can get loans from only two MFIs at a time.
However, industry experts do not see top-up loans as cause of crisis.
“Topping up of loans does not necessarily mean over-indebtedness. Technically, nothing prevents MFIs from giving Rs 60,000 in more than two instalments. In fact, that is a better way to assess the risk profile of a customer. There is no regulation that says that other entities cannot lend. For example, a bank or a small finance bank can always lend to a borrower,” says said Ratna Vishwanathan, chief executive officer, MFIN.
“The core problem with MFIs has been their supranormal growth over the past three years or so. This, fortunately, has not yet translated into a crisis. The reasons for this are primarily the greater institutional strength of MFIs, the extent of the problem (over-leveraging of clients) limited to certain geographies, and above all, the capacity of the industry deal with issues on the ground,” said Alok Prasad, industry expert and former CEO of MFIN.
Consolidation on cards
With rapid growth in the MFI sector, consolidation seems inevitable. Notably, with the cost of funds dramatically reducing for SFBs from around 14 per cent to 8 per cent (the average cost of term deposits for SFBs), they are likely to give intense competition to small MFIs. Smaller MFIs get loans from banks at rates as high as 16-18 per cent.
Demonetisation, along with rumours of debt waiver, further added to the woes of MFIs, especially the smaller ones. According to the Microfinance Institutions Network (MFIN) data, available till December 15, repayment collection by MFIs stood at 84 per cent, against the general mark of 99 per cent. Over the last month, the collections have improved, but are yet to normalise. The states in which rumours of debt waiver have led to defaults are Maharashtra, Madhya Pradesh, Uttarakhand, Karnataka and Uttar Pradesh. In some of areas repayments had dropped by 25 to 30 per cent.
“The bigger NBFC-MFI players are becoming banks. Some of the small and mid-sized MFIs have been acquired or have seen stake purchases by banks. Hence, there is already a consolidation in the space. The cost of funds for small and mid-sized MFIs is higher compared to the MFIs which became banks. Moreover, the interest rates are capped as per RBI guidelines, so smaller players will face more challenges. Some of the smaller MFIs might need to diversify or merge with bigger players,” said Kalpana Pandey, MD & CEO, CRIF High Mark Credit Information.
Notably, mid-sized MFIs could become potential targets for takeovers.
“Within a couple of months, around eight Small Finance Banks (SFBs) would be fully operational. Many of the regular commercial banks, including those who have acquired MFIs, are building their microfinance business. Hence, the competitive landscape is changing quite dramatically. This change has to be viewed as a process, not an event. Over time, it will lead to a much more challenging business environment, particularly for the small players. MFIs with a loan book of under Rs 100 crore or so are already facing significant problems. Those having a portfolio between Rs 100-500 crore are also challenged. But, their ability to withstand the market challenges is much greater. Alongside, the size and scale of operations would make them a more interesting target for takeover,” said Prasad.
In fact, with private sector banking banks entering the microfinance space, consolidation has already started.
In 2016, Kotak Mahindra Bank acquired Bengaluru-based BSS Microfinance. Earlier, RBL Bank acquired a stake of about 10 per cent in Utkarsh Micro Finance, which is now an SFB. In July 2016, IDFC Bank acquired Trichy-based Grama Vidiyal Microfinance. This was IDFC Bank’s second deal in the MFI space. Earlier, IDFC Bank had picked up 10 per cent in east India-based ASA International India Microfinance. In March 2016, DCB Bank had acquired a 5.81 per cent stake in Odisha-based Annapurna Microfinance.
“There will be consolidation, as the business is reaching a certain scale, and will require a new set of managerial scale and technological requirement. When financial institution reach a mid-stage, there is a reason for consolidation,” according to an official of a private sector bank.
Surely, with micro finance assuming macro proportion, survival of the fittest would be the guiding principle for those seeking a share of the thrift credit pie.