India Ratings revises microfinance sector outlook to 'neutral' for FY23

India Ratings has revised upwards its outlook on the microfinance sector to 'neutral' from 'negative' next fiscal, on the back of a revival in growth that could clip at 30 per cent.

The agency expects the sector to grow 20-30 per cent in both FY22 and FY23 in comparison to the below 10 per cent AUM (assets under management) growth in the previous two years. Given the yield limitations, mid- and small-MFIs have not seen comparable growth.

While large MFIs will continue with their normal disbursement trends and new customer acquisitions as normalisation happens in FY22 and FY23, small- and mid-ones will ramp up their activities once the harmonisation guidelines are implemented.

The agency see that the impact of the pandemic on credit cost has been largely absorbed by now, and there is a likelihood of normalised growth for these small lenders. Also, their collections, especially those disbursed after the pandemic, have recovered and refinance has become relatively easy now.

Another booster is the increased viability expectations for small-mid MFIs after the implementation of harmonisation guidelines, as they can now revise their lending rates, which will improve pre-provision operating profit margins and provide higher tolerance to withstand credit cost, the report said.

The agency expects the credit cost to decline to a median of 1.5-5 per cent in FY23 from 4-7 per cent in FY22 as collections are better since December and it will be lower than FY22. The decline would largely be a function of growth, provision coverage and recovery from restructured loans.

MFIs in states such as Assam, Bengal and Kerala, and specific districts of Maharashtra and Gujarat where there was delayed easing of lockdown restrictions under both the waves along with other regional issues will see higher slippages, though especially those that have provided longer moratoriums.

Under the current interest rate pricing cap, small and mid MFIs have been vulnerable to credit shocks. They are facing the challenges of availability of credit and adverse cost of borrowings even amid declining interest rates. One of the key objectives of harmonisation is to address this. Consequently, MFIs may be able to undertake risk-based pricing as well as cost-plus pricing, leading to improved viability of small and medium players and aid them in building both scale and operating buffers, and increase their credit worthiness.

In the past 15 months, even mid and small players have managed to refinance existing debt compared to the FY17 to 1HFY21 period, supported by government guarantees to banks for on-lending to MFIs.

The agency expects large players to continue to avail of financing from Q4 onwards, and small MFIs would have it relatively easy once the harmonisation guidelines are implemented.