Microfinance institutions set for better days, as collection improves, loan sales jump

India Ratings has revised the outlook on the microfinance sector to 'improving' from 'neutral' and has also maintained the 'stable' rating outlook for FY24.

Warning that inflation may be a potential risk to the sector, it said more than 65 per cent of the MFI borrowers are employed in the essential goods and services segments. (Image: Pixabay)

Microfinance players have already come out of the massive hit they took during the pandemic and are likely to report lower credit cost by the end of this fiscal, as growth momentum is on an upswing, says a report.

India Ratings has revised the outlook on the microfinance sector to 'improving' from 'neutral' and has also maintained the 'stable' rating outlook for FY24. It expects the sector to notch up high double-digit growth of 20-30 per cent, on improved collections and disbursals. It sees the credit cost to improve to 1-3 per cent from 1.5-5 per cent this fiscal.

Microfinance institutions have already absorbed the impact of the pandemic by the December quarter, India Ratings said in a note on Wednesday. It expects the growth momentum to continue in FY24, as disbursements are picking up, which in turn will lead to higher growth.

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According to India Ratings, there are two key risks for the microfinance sector over the next 12-18 months -- inflation and elections. These may impact cash-flows of borrowers in FY24 and in the first half of financial year 2024-25, it said.

credit growth in MFI sector

MFIs have incurred cumulative credit costs (credit cost to average AUM) of 11.1 per cent over FY21-H1FY23, as nearly 9 million borrowers were in default through the pandemic, the report said. It, however, expects delinquencies and credit costs to normalise, as bulk of the portfolio now is based on post-pandemic disbursements and collection efficiencies at consolidated levels are steadily improving.

Overall, the agency expects FY24 credit costs to be in the range of 1-3 per cent, better than 1.5-5 per cent in FY23. The sector will continue to grow between 20 and 30 per cent in FY23-24, as MFIs may see a higher proportion of borrower additions in FY24 on the back of the waning pandemic impact.

Warning that inflation may be a potential risk to the sector, it said more than 65 per cent of the MFI borrowers are employed in the essential goods and services segments and hence inflation may impact their cash inflows positively. But it also has an impact on their expenditure and hence the combined effect may not be definitive, it said.

Another growth driver is the substantial increase in securitisation volume in FY23, and it expects a similar trend in FY24. With the new securitisation guidelines in place, highly seasoned MFI loans may shift to direct assignment transfers.

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