TT Epaper
The Telegraph
TT Photogallery
 
CIMA Gallary

Microfinance on a turnaround track

Mumbai, June 27: The microfinance industry is likely to see a turnaround with its loan book growing at 35 per cent to reach Rs 45,000 crore by March 2016, Crisil has said in a report.

The sector has put behind the Andhra Pradesh crisis and is now emerging as one of the fastest growing segments in the domestic financial space.

Greater regulatory clarity, including the recognition of the Micro Finance Institutions Network as a self-regulatory organisation by the Reserve Bank of India (RBI), and a stable operating environment have helped to boost the shareholders’ confidence in the sector.

“The sector is far more resilient today than what it was in the past. Greater clarity from the RBI’s guidelines, deeper penetration of credit bureaux and increasing use of technology to improve collections are distinctive features of the current phase of growth in India’s MFI sector,” Pawan Agrawal, senior director at Crisil Ratings, said.

The industry sunk into a crisis after 2010, when the Andhra Pradesh government promulgated an ordinance to regulate its activities. The development affected not only loan recoveries, but also bank funding.

However, there has been a reversal in the sector’s fortunes.

Andhra Pradesh earlier had accounted for a major share of MFI assets. No state now accounts for more than 20 per cent of loans from the microfinance industry.

Over the past three years, MFIs have raised Rs 2,000 crore as equity and Rs 24,000 crore as additional funds from banks.

Bank funding to MFIs is eligible for priority sector lending status.

In its report, Crisil said there had been an improvement in the flow of debt funding and equity capital to the sector, resulting in 43 per cent growth in MFI loan assets during 2013-14.

Equity route

The rating agency, however, added that to sustain the current pace of growth, MFIs will have to raise equity and address the challenges associated with low promoter shareholdings and a near-term decline in profitability.

Crisil estimates that the MFIs will need to raise equity of at least Rs 1,800 crore over the next two years to maintain the growth momentum.

Further, the MFIs’ dependence on bank loans, specifically from the top five banks, is expected to remain high over the medium term.

According to Crisil, the MFIs are adequately capitalised for their current scale of operations.

However, three years of rapid growth have skewed the sector’s gearing (debt-to-equity ratio) to 5.4 times, from around three times in the past, it said.

 
 
" "