Microfinance institutions (MFIs) are likely to proceed with cautious growth approach going ahead, after recording rapid growth in the range of 25-40 per cent in earlier years, and subsequently seeing stress in their asset quality, HP Singh, CMD, Satin Creditcare Network, tells businessline in an interaction. He talks about when the MFI sector stress is likely to peak out and funding scenario for MFIs. Edited excerpts:
MFI industry portfolio has moderated sharply. When do you see growth coming back in meaningful way?
It would vary on an institution to institution basis. But I think we will not have the growth rate we used to see earlier, between 25-40 per cent. It will be a cautious growth, in the range of 10 per cent or so, which is probably the best for the industry as a whole. We are addressing ourselves by not growing sharply above 10 per cent. Since we have seen positive trends in terms of collections, processes and attrition factors, we have been disbursing. Since the last 3-4 months, we have been disbursing, but not going over the top considering various factors. Cautious growth is probably what will happen from here on.
When do you see stress peaking in the MFI sector?
It is not just the over leveraging factor, which is probably being talked about as the sole reason why there are headwinds in the industry. It is a combination of few factors put together which actually led to little deterioration in credit cost and asset quality. First, definitely there have been some degree of over leveraging to an extent but there have been institutions who have been very cautious on this front, including us. Climate change (extreme heatwaves, floods etc.) and economic activity not picking up in rural areas the way it should have (income levels), also contributed to deterioration in asset quality. Employee attrition was another factor, and customers behaviour also changed a little bit. A customer takes a cue if there is political interference in the form of a loan waivers etc. So, these all factors combined led to deterioration in asset quality.
Once these factors start dying down one-by-one, it will have positive effect. If you see political interference, which was at heightened peak six months back, has dropped down significantly except in Karnataka. I think the industry will get back to normalcy in a couple of quarters, and again it will be on an institution to institution basis. MFIs who are able to navigate in better fashion, look after their processes, data, technology, underwriting and human resources will come out faster. For us, the peak happened in October 2024 and from November we are back to pre-deterioration days and are witnessing good repayment trends.
Your guidance on credit cost?
We aim to maintain 4.5-5 per cent credit cost in FY25, I think we will be able to achieve that.
Are banks being hesitant in lending to MFIs?
We don’t have a single challenge in terms of funding. We are disbursing normally, we have credit lines available for us. For us, there is not even one bank with whom we have a relationship, who is refusing to give us a loan, accordingly we don’t see any liability or liquidity challenge. The other thing we are looking at is raising funds from overseas rather than domestic institution. We are looking at foreign funding coming in, external commercial borrowings (ECB) transactions etc. This is a large market, which was probably untapped by us also and we are seeing good traction. We recently raised our first syndicated social term loan of $100 million via ECB. This facility was arranged solely by Standard Chartered Bank who also participated in funding from SCB Gift City branch. Other participating banks included six prominent Sri Lankan banks. It is not that they are not aware of what is happening in the MFI industry in India, but they feel that for good run institutions, they can lend.
Your margin has moderated slightly. Has funding cost inched up or yields have fallen?
Funding cost has not increased. Yield also not has gone down, maybe some drop in outward lending rate and some increase on our opex as we are putting more manpower to manage better collection efficiency.
Have you considered applying for a small finance bank license?
Whatever we want to achieve, we are doing that with our MFI and other businesses. We have got housing finance company, we have MSME lending business. So, we can do as much as much we want to, the only difference that comes with SFB is deposit taking ability. Today, thankfully we do not have any issue in sourcing liability. When the opportune time comes, if we really want to transit ourselves into a bank, we will probably assess, but nothing is on the table as of now.
Published on March 14, 2025
