Driven by moderation in growth, decline in profitability and subdued funding prospects in their core business, several microfinance institutions are starting new lines of business that are focused on secured lending and leveraging their branch networks to offer other retail products, says a report by rating agency Crisil.
According to the report, the MFI sector's growth and profitability prospects have moderated since the implementation of the stringent legislation by the Andhra Pradesh Government. This has resulted in operating challenges associated with regulatory restrictions on multiple lending, loan size, and end-use of loans, as well as the funding environment getting vitiated.
Funding yet to pick up
While there has been some regulatory clarity and selective lending by banks in the last few months, funding to the sector has not picked up.
Crisil-rated MFIs have raised Rs 500 crore from banks and alternative sources in the current financial year so far, much lower than the levels before the Act was passed. MFIs are, therefore, diversifying their business models by starting new ventures aimed at entering other asset classes (mostly secured, such as loans against gold jewellery, housing and vehicle loans).
Mr Nagarajan Narasimhan, Director, Crisil Ratings, said: “While most of these new business initiatives are at an early stage, MFIs' ability to develop systems and processes, and scale up operations will shape their business risk profiles.”
The report also states that the recent RBI guidelines, creating a new category of non-banking financial companies called NBFC-MFIs, will enhance stakeholder confidence in the sector as they highlight the need for transparency in interest rates and address issues on multiple lending and coercive recovery.