BFSI Summit: Stress at MFIs to recalibrate in a few months, say NBFC CEOs

The MFI sector has been facing significant challenges over the past five to six months, leading to a notable decline in asset quality

The stress in the microfinance sector should recalibrate in a few months, industry experts said on Thursday at the Business Standard BFSI Insight Summit 2024.

 

The MFI sector has been contending with significant challenges over the past five to six months, leading to a notable decline in asset quality. Recently, the Reserve Bank of India (RBI) issued guidelines for banks and NBFCs engaged in microfinance lending, requiring borrowers to repay outstanding loans before taking on fresh ones.

 

“There is no premium anywhere to build anything long-term. Everything has become short-term oriented. Public market is short-term oriented, Investors are short-term oriented, and so is the management.  In the MFI Industry, the pandemic hit the MFI industry hard. In the MSME segment, we are seeing more resilience to come,” said Shachindra Nath, vice-chairman and managing director, U GRO Capital.  

 

 

“As of today, we are not seeing the stress (in the MSME segment), which has been built up in consumer, personal loan, microfinance industry. Retail trade in Tier-II, Tier-III, Tier-IV towns and small manufacturing are doing much better. They have still not reached the pre-Covid number. They are bound to touch in the next 45 days,” he added.

 

As of June, the overall microfinance portfolio stood at Rs 432.7 crore, showing a 2.3 per cent quarter-on-quarter (Q-o-Q) decline from March 2024. Despite this contraction, banks and NBFC-MFIs remain dominant in the sector, holding a combined market share of 72 per cent.

 

Venkatesh N, founder and managing director of IIFL Samasta, a financial institution committed to women’s economic empowerment, said: “Normally, we have been used to something like this once in three years. Then we had Covid-related stress. But this one is something which we look at more internally of what went wrong with us and how we have gone about our practices. I think so we have recalibrated ourselves. I think we should all do some work on that.”

 

He said the MFI sector has faced challenges from a severe heatwave, which impacted agricultural activities, and from over-lending concerns flagged by the RBI in Uttar Pradesh and Bihar.

 

In response, the sector has started reassessing its approach to agriculture lending. Additionally, he highlighted that new guidelines from the Self-Regulatory Organisation (SRO) have capped the number of lenders per customer to four, impacting around 10 per cent of MFI customers who previously had borrowings from more than four lenders.

 

These factors have added pressure to the MFI sector, prompting an internal review of practices. In response, MFIs have recalibrated their strategies to address these challenges.

 

“If you look at the MFI sector, we cater to close to 65 to 70 per cent of the agri and agri-allied sector. If you look at the heat wave, it was quite strong. There was some percentile effect of the heat wave. Then RBI flagged off a couple of geographies that were getting overheated due to excessive lending. These geographies were predominantly pointed out as Uttar Pradesh and Bihar,” he said.   

 

“We started re-looking at what is happening in agri. And followed up with the Gharne, which the SRO had brought forward, which also capped the number of lenders to the customer. There is no capping of the number of lenders to a customer. Right now, we have a capping of the number of lenders. Having four lenders is the maximum cap. So that also has taken over a little bit. We see around 10 per cent of our overall customers having borrowings from more than four lenders. So, all these have contributed to the pressure,” he added.

 

Meanwhile, private banks witnessed a hit on their profitability due to increase in the MFI-related provisions. IndusInd Bank saw slippages reach Rs 1,798 crore, with Rs 400 crore from microfinance, and an 87 per cent increase in provisions to Rs 1,820 crore.

 

Kotak Mahindra Bank reported that about a quarter of its slippages came from the microfinance segment, with provisions rising by 60 per cent to Rs 660 crore and fresh slippages increasing 43 per cent to Rs 1,875 crore.