Loan disbursements by the microfinance industry, which was slightly subdued in the first quarter of the current fiscal due to players busy implementing the recent guidelines issued by Reserve Bank of India, is expected to witness a traction on the back of steady demand and improvement in asset quality. The industry had to put the system and operations in place to be able to adhere to the revised guidelines and that took some time.
In March, the central bank released its final guidelines for MFIs, which would apply to all entities, including banks, small finance banks and NBFCs engaged in the sector. Under the revised guidelines, the RBI had set a common household limit of ₹3 lakh for loans to qualify as microfinance, unlike the earlier definition that distinguished rural and urban households. This led to a spurt in rejection of loan applications, thereby impacting disbursements.
According to Jiji Mammen, ED and CEO, Sa-Dhan, the rejection rate had increased by around 15 per cent as household income beyond ₹3 lakh could not be qualified as microfinance loans.
“More effort had to be put into sourcing of applications as the household income had to be taken into consideration. This led to higher rate of rejection, which had increased to close to 45-50 per cent of the total loan applications sourced, compared to 30 per cent earlier,” Mammen told businessline. This, in turn, affected disbursements.
The lack of readily available database of household income was also a challenge for players. So, they had to create the database, which took some time, according to insiders.
The revised regulations would require the industry to increase their exposure and look deeper into existing markets and also explore newer geographies.
The microfinance industry, which has a total Gross Loan Portfolio (GLP) of ₹2,93,154 crore as on June 30, 2022, serves close to six crore unique borrowers through 11.8 crore loan accounts.
The GLP as on June 30, 2022, showed an increase of around 24 per cent on a year-on-year basis, compared to ₹2,37,369 crore as on June 30, 2021, said a recent report put out by the Microfinance Institutions Network (MFIN). Microfinance loan disbursals during Q1 FY23 improved significantly to ₹45,830 crore, compared to ₹25,503 crore in the same quarter of last financial year.
The number of loans disbursed also saw an increase during Q1 FY23 to 116 lakh from 71 lakh last year.
“After the announcement of harmonised regulations for microfinance in March, most institutions took some time in making policy changes and adapting to the new guidelines, but the industry was still able to record a growth of 23.5 per cent in portfolio on a year-on-year basis and 2.7 per cent over the previous quarter, which should see further strengthening in the coming quarters with supportive operating and regulatory environment,” said Alok Misra, CEO & Director, MFIN, in the report.
Under the revised guidelines, regulated entities (REs) lending to the microfinance segment, will have to ensure that loans are collateral-free and not linked with a lien on the borrower’s deposit account; repayment obligations are capped; interest rates are not usurious; and without pre-payment penalty.
The maximum possible indebtedness per borrower was also increased to ₹2.4 lakh (from half of that earlier). It has also done away with the margin caps, specifically applicable to the NBFC-MFIs.
While the effective date of these directions was April 1, the central bank had, in view of implementation-related difficulties expressed by some regulated entities (REs), advised them to implement these directions completely at the earliest but not later than October 1.
“Almost all NBFC-MFIs increased their rate of interest in Q1 FY23 under the revised regulatory framework. However, implementation of the new guidelines took some time and disbursements slowed down in Q1 FY23.
“Nevertheless, disbursements picked up towards the end of Q1 FY23 and ICRA expects a 22-25 per cent growth in assets under management of NBFC-MFIs in FY23 over last year,” said Sachin Sachdeva, Vice-President and Sector Head, Financial Sector Ratings, ICRA.
According to Kuldip Maity, MD and CEO, VFS Capital, there is good demand for credit and with the systems and compliances put in place, the industry should be able to witness good growth in disbursements and loan outstanding.
The average collection efficiency (including overdue recoveries) has also improved and has reached closer to pre-Covid levels. Consequently, delinquencies are improving and the asset quality indicators are expected to improve further in FY23, said Sachdeva.