Microfinance loans are seeing good traction

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The microfinance industry’s loan disbursements, which were slightly subdued in the first fiscal quarter due to players busy implementing recent Reserve Bank of India guidelines, are expected to pick up on steady demand and improving asset quality. Industry had to set up the system and processes to be compliant with the revised guidelines, and that took time.

In March, the central bank released its final guidelines for MFIs, which would apply to all companies, including banks, small financial banks and NBFCs, operating in the sector. Under the revised guidelines, the RBI had set a common household limit of ₹3 lakh for loans to qualify as microfinance, in contrast to the previous definition that distinguished rural and urban households. This led to erratic refusals of loan applications, affecting payouts.

According to Jiji Mammen, ED and CEO of Sa-Dhan, the rejection rate had increased by around 15 per cent as household incomes over £3,000 could not qualify as microfinance loans.

“More effort had to be put into finding applications because household income had to be taken into account. This resulted in a higher rejection rate, which had increased to nearly 45 to 50 percent of total loan applications procured, compared to 30 percent previously,” Mammen said business line. This, in turn, impacted payouts.

The lack of an easily accessible household income database was also a challenge for players. So they had to create the database, which insiders say took some time.

The revised regulations would require the industry to increase their commitment and delve deeper into existing markets, as well as exploring newer geographies.

The microfinance industry, which has a total gross loan portfolio (GLP) of ₹2.93.154 billion as of June 30, 2022, serves nearly 6 billion unique borrowers across 11.8 billion loan accounts.

GLP showed a year-on-year increase of around 24 percent on June 30, 2022, compared to ₹2,37,369 crore on June 30, 2021, according to a recent report issued by the Microfinance Institutions Network (MFIN). Microfinance loan disbursements improved significantly to ₹45,830 billion in the first quarter of fiscal 23 compared to 25,503 crore in the same quarter last fiscal year.

The number of loans disbursed also rose to 116 lakh in the first quarter of FY23 from 71 lakh last year.

“Following the announcement of harmonized microfinance regulations in March, it took most institutions some time to make policy changes and adapt to the new guidelines, but the industry still saw portfolio growth of 23.5 percent year-on-year. year-on-year and 2.7 percent sequentially, which should be further strengthened in the coming quarters with a supportive operational and regulatory environment,” said Alok Misra, CEO and director of MFIN, in the report.

Under the revised guidelines, Regulated Entities (REs) lending to the microfinance segment must ensure that loans are free of collateral and not associated with a lien on the borrower’s deposit account; Repayment obligations are capped; Interest rates are not usury; and without prepayment penalty.

The maximum possible debt per borrower has also been increased to 2.4 lakh (half from previously). The margin caps specific to NBFC-MFIs have also been abolished.

While the effective date of these instructions was April 1st, given implementation difficulties expressed by some Regulated Entities (REs), the Central Bank had advised them to fully implement these guidelines at the earliest, but no later than October 1st.

“Almost all NBFC MFIs increased their interest rate in the first quarter of FY23 under the revised regulatory framework. Implementation of the new policies took time, however, and payouts slowed in the first quarter of FY23.

“Nonetheless, disbursements picked up towards the end of the first quarter of FY23 and ICRA expects assets under management by NBFC-MFIs to grow by 22-25 percent in FY23,” said Sachin Sachdeva, vice president and sector head of financial sector valuations, ICRA.

According to Kuldip Maity, MD and CEO of VFS Capital, there is good credit demand and with the systems and compliances in place, the industry should be able to see good growth in disbursements and outstanding loans.

Average collection efficiency (including overdue recoveries) has also improved and is approaching pre-Covid levels. As a result, arrears are improving and asset quality indicators are expected to improve further in FY23, Sachdeva said.

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