Microfinance Companies in India to witness strong growth in 2014 – 2015 – Crisil

Sector’s loan portfolio to reach Rs.450 billion by March 2016; raising equity capital will be critical

The loan portfolio of India’s microfinance sector is set to grow at a compounded annual rate of 35 per cent, to reach Rs.450 billion by end-March 2016. Unlike in the period prior to the Andhra Pradesh crisis, the microfinance institutions’ (MFIs’) current growth phase is more resilient, supported by stronger building blocks and a rebound in stakeholder confidence. But to sustain the current pace of growth, MFIs will have to raise equity. To do so, they will need to address challenges associated with low promoter shareholdings and a near-term decline in profitability.

crisil microfinance 2014

Says Mr Pawan Agrawal, Senior Director, CRISIL Ratings, “The sector is far more resilient today than it was in the past. Greater clarity from the Reserve Bank of India’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”.

Microfinance Companies in India 2014

In addition, improved geographical spread of assets has raised stakeholder confidence and improved funding availability. No state now accounts for more than 20 per cent of loans from the MFIs, down from 35 per cent at the time of the crisis. Over the past three years, MFIs have raised Rs.20 billion as equity, and Rs.240 billion as additional funds from banks. Notably, bank funding to the MFIs is eligible for priority sector lending status. However, the MFIs’ dependence on bank loans, specifically from the top five banks, is expected to remain high over the medium term.

The MFIs are adequately capitalised for their current scale of operations. However, three years of rapid growth have skewed the sector’s gearing to 5.4 times, from around 3 times in the past. A CRISIL analysis indicates that the MFIs need to raise equity of at least Rs.18 billion over the next two years to maintain growth momentum and gearing at current levels.

For this, the sector needs to address the following two elements: First is promoter shareholding, which has declined significantly following repeated infusions of capital. For the 10 leading MFIs, the promoter stakes are as low as 20 per cent. Says Ms Rupali Shanker, Director, CRISIL Ratings, “Low promoter stakes, and the absence of a dominant shareholder could disrupt strategic direction and decision making, and constrain the quantum of equity that MFIs raise”.

Second is a potential reduction in investor appetite because profitability of the large players is set to decline by around 30 basis points annually over the next two years. With interest margin capped at 10 per cent from April 2014, interest spreads could fall by up to 120 basis points. CRISIL expects MFIs to offset this partially by increasing their fee incomes especially, from banking correspondent activities, and by cranking up scale of operations and operating efficiencies.

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