Microfinance grows in loan size and urban footprint: EY report

Combined GLP grew 84% to Rs 53,200 crore in FY16 from Rs 28,900 crore in the previous year

Rise in loan ticket size and shift of borrower base in favour of urban areas marked a strong rebound in Indian microfinance industry, whose combined gross loan portfolio (GLP) grew 84 per cent to Rs 53,200 crore in FY16 from Rs 28,900 crore in the previous year.

This and other emerging trends of the micro finance sector, which has been on a growth path for he past years after taking a bit hit in the aftermath of the curbs imposed in 2010 by the government of the undivided Andhra Pradesh, have been captured in a report titled 'Evolving landscape of microfinance institutions in India'.

The sector reported a significant surge of 84 per cent in GLP in FY16, since MFIs indulged in issuing large loans to clients after the RBI relaxed indebted exposure to single borrower from Rs 50,000 to Rs 100,000 in April 2015, according to the report.

It was launched at the National Summit on Microfinance, organised by the Associated Chambers of Commerce and Industry (Assocham) on Tuesday.

MFIs have reported a 58 per cent jump in average loan size per customer from Rs 10,364 in FY14 to Rs 16,394 in FY16, since during the same period gross loan portfolio has increased three-fold while there was a two-fold increase in client base.

"Some industry experts have ascertained the high growth pattern to the rise in clients, increase in general income levels and ease of lending rules by the RBI. However, according to others, increased lending to same clients may be risky for MFIs, since they serve vulnerable segments, which entails increased underlying risk," the report prepared by global consultancy firm EY.

About 60 per cent of GLP was still attributed to the rural sector while the remaining 40 per cent was from metros, urban and semi-urban areas. About 31 per cent of the loans were given for agriculture and allied activities while 64 per cent given for non-agriculture and 5 per cent for household finance as of March 2016.

In terms of regional break up, south India had the highest share at 35 per cent of GLP followed by west and north India at 25 per cent share each.

Since, inception the Indian MFI sector has been perceived as a predominantly rural-focused sector, largely different from the MFI sector in Latin America as well as parts of America and Africa. However, recently, MFIs have shifted their focus from rural hinterlands to urban pockets. The industry's outreach to urban clients was increasing every year and in FY15, for the first time in its history, Indian MFIs reported more urban clients than rural ones. The share of rural customers has drastically declined from 69 per cent in FY12 to 33 per cent in FY15.

A large number of MFIs have shifted to an urban-centric business model to cut-down operating costs and maximise operational efficiency. "The rise in urban clients of MFIs also underlines reluctance of banks to lend to small borrowers. In spite of the presence of banking infrastructure in urban areas, there is a strong demand from the unorganised sector and migrants for microfinance loans," the report added.

The Indian microfinance industry is dominated by NBFC MFIs with an 88 percent market share. After 2010, MFIs consolidated their operations since the sector faced more stringent regulatory requirements. Number of MFIs declined from over 70 in pre-2010 to 56 in early 2016. Following the initial consolidation, microfinance companies started aggressively expanding operations. From FY13 to FY16, branch network expanded at a compounded annual growth rate (CAGR) of 27 per cent.

Debt funding for MFIs has increased at a CAGR of 67 per cent from FY13 to FY16. However, microfinance companies have started tapping non-bank financing sources such as mutual funds with the aim to diversify their funding sources. Share of non-bank funding has doubled to 40 per cent in FY16 from the previous year.

During FY16 several large MFIs have raised funds by issuing non-convertible debentures to mutual funds houses. Large MFIs accounted for 89 per cent of total debt funding received in FY16 while medium and small MFIs accounted for just 9 per cent and 2 per cent respectively.