MFIs may face loan quality shocks: ICRA

With rising competition, high pace of growth, and increased focus of some players on individual loans without group guarantee, asset quality indicators of micro-finance institutions (MFIs) could deteriorate from present levels, cautioned credit rating agency ICRA.

The agency said discipline at both the borrower and MFI levels, and tactful interventions by stakeholders in tackling field-level issues would be key determinants of asset quality, going forward.

“Some pressure on asset quality was witnessed in FY2016 due to communal and political issues in certain pockets of Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand and Karnataka, while other States were impacted by environmental issues like drought and floods.

“However, timely action by MFIs, with support from self-regulatory organisations (SROs) and government bodies, helped arrest delinquencies in most cases,” ICRA said.

Nevertheless, the segment remains vulnerable to asset quality shocks owing to risks associated with unsecured lending business, political risks, and operational risks arising out of cash handling, it added.

ICRA observed that MFI asset quality indicators continue to be healthy (zero days past due of about 0.35 per cent as on March 31, 2016), supported by the safeguards put in place by regulators, including data sharing through credit bureaus, restrictions on overall leveraging of ₹1 lakh per borrower (SRO MFIN’s directive caps the same at ₹60,000), and stipulation that not more than two MFIs can lend to the same borrower.

While the two operational credit bureaus have been key enablers for maintaining asset quality in the sector, the agency said that certain issues, such as limited coverage of self-help group (SHG) bank linkage programme data, and issues related to multiple identity cards being used by borrowers for availing loans from more than two MFIs, need to be addressed so that MFIs are able to comprehensively assess the leveraging status of borrowers.

Supreeta Nijjar, Vice-President of ICRA, said: “Based on its experience from field visits of over 170 centres (both urban and rural) across 10 States, covering more than 22 MFIs across India, ICRA gathers that while borrowers are largely aware of RBI norms on multiple borrowing and loan caps, the general field discipline of some MFIs has reduced owing to an increased number of members in the centres.

“A number of borrowers with more than two loans and instances of utilisation of loans for non-income generation purpose were noticed….”

Kalpesh Gada, Senior Vice-President of ICRA, observed that if the (loan) ticket sizes were to double from the current levels (on account of improving income levels, inflation, higher eligibility of borrowers moving to higher loan cycles) over the next three to four years and MFIs were to increase their presence in under-penetrated areas, the micro-finance market (across SHGs, MFIs, and banks) could reach ₹3.3-4.3-lakh crore over the next three to four years from ₹1.40-lakh crore as of March-end 2016.

With increased client outreach, penetration levels (clients served as a proportion of target segment) stood at 50-55 per cent by the end of FY2016.

However, client penetration levels vary across States, with mature markets, such as Karnataka, Tamil Nadu, and West Bengal having high penetration levels and a number of large states, such as Uttar Pradesh, Bihar, Jharkhand, and Chhattisgarh still being under-penetrated.

Gada said: “With established markets getting saturated, going forward the MFIs will seek to improve penetration in new geographies, to support growth along with offering higher loan sizes to existing borrowers (present ticket sizes are around ₹20,000-25,000).”