Recently, credit rating agency ICRA expected profitability of non-banking financial companies-microfinance institutions (NBFC-MFIs) to improve further to 2.7-3.0% in FY2024 and further to 3.2-3.5% in FY2025, from 2.1 per cent in FY2023.
Importantly, ICRA estimates that a large part of the credit cost pertaining to the Covid-19 pandemic was absorbed till FY2023.
Collection efficiencies have also improved to the pre-covid levels. Thus, the residual credit cost, which would have to be absorbed in FY2024, shall be lower.
Also, the improvement in net interest margins would help NBFC-MFIs report an uptick in their profitability in the current and the next fiscal.
For FY23, the entities witnessed robust expansion of 38%, and ICRA expects the growth to remain healthy at 24-26% FY2024 and 23-25% in FY2025.
The loan sales growth story
ICRA said MFIs are likely to report a growth of 24-26 per cent in loan sales this fiscal and 23-25 per cent in FY25 when they are also likely to see a further spurt in profitability to 3.2-3.5 per cent.
This growth story is likely to be driven by three key factors: EWS population, average loan exposure per client, micro and small businesses.
According to J Sridharan, Executive Vice Chairman, Bharat Financial Inclusion Ltd, a 100% subsidiary of IndusInd Bank, adding “new to bank / lender” as well as “new to formal credit” clients from EWS segment of population will continue to be a large driver.
Also, the average loan exposure per client, when looked at the industry level is still not fully in pace with the long term inflation, he believed.
The nation’s economic growth getting stabilised in the region of 6% – 8% p.a., and also getting broad-based, provides sufficient opportunity to increase the size of individual exposure.
He further adds that the micro and small businesses, both formally organized as well as unogranized, have always been a large contributor in absorbing the national labour force.
As such, the debt capital requirements for the nano, micro and small enterprises is certainly on a high growth path.
Group models increasing collection efficiency
Joint Liability Group and Self-Help Group model enables a robust credit culture. There is a group support to tide over temporary cash flow mismatches in payment of the periodic loan instalments.
Sridharan believed that besides the reliance on the group models, the lenders are also increasingly deploying analytical tools to identify potential stress and are able to initiate higher level of customer interaction at an early date.
Also larger MFI entities are able to mine the data from CICs to build a more robust Early Warning Indicators, which helps in improving collection efficiency, he believed.
“Nearly 40% of the MFI borrowers under the JLG model have a unique lender; about 35% borrow from two lenders and the rest are borrowing from more than two lenders. The average loan per borrower with each lender is marginally below 2. Given this, the typical number of loans a borrower services ranges between 2 and 6,” J Sridharan said.
