After undergoing consolidation in the last few years, India's microfinance sector is likely to grow at 24 per cent over the next five years, a report said.
"The microfinance sector has made a strong come back after the Andhra Pradesh crisis and is poised to grow at a CAGR (compound annual growth rate) of 24 per cent over FY15- FY19," said the report by India Ratings and Research.
In 2010, microfinance institutions (MFIs) came under the scanner of authorities in Andhra Pradesh, a key market for them, after reports of suicide by borrowers due to alleged coercive recovery methods adopted by them.
The growth is projected to be stable with margin caps, transparency on rates, benign recovery means, self-regulation by watchdogs such as MFIN and Sa-Dhan, the rating agency said.
Credit checks of borrowers with agencies like Equifax and Highmark, in line with the Reserve Bank guidelines issued in FY12, would also contribute towards the growth.
The report said though the sector may not witness the over 100 per cent growth prevalent before FY11, it can expand faster than banks and most other non-banking financial companies (NBFCs). The sector could require an equity infusion of Rs 2,700 crore to achieve the expected growth.
The agency estimated that the total NBFC-MFIs loan portfolio would increase to Rs 74,800 crore by FY19 from Rs 25,300 crore in FY14 by doubling borrower base and increasing disbursements.
MFIs, which give small loans to low-income borrowers, have expanded in Uttar Pradesh, Maharashtra, MP, and Bihar, and continue to grow in their traditional strongholds of Tamil Nadu, Karnataka and West Bengal.
"MFIs need to be careful of the portfolio quality as the newer states have exhibited higher non-performing assets in self-help group-bank linkage programme," the report said.
MFIs require to evolve their models to provide range of services to their clients to remain competitive, it said.
"Though MFIs' advantages of door-step delivery, simple documentation and short turn-around time are likely to be retained, they may have to be watchful of the competing models as they develop."
They may require to compete with some of these models on interest rates. The competing models could provide loans at interest rates of 12-18 per cent per annum as against 23-26 per cent by microfinance players, the rating outfit said.
It said a conversion to small bank can provide an MFI access to low-cost funds (savings) and reduce costs which could translate to lower interest rates on loans.
