SECTOR

RESEARCH

MICROFINANCE

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October 2019
 MFIs in India poised to grow at 40-45 per cent in FY20
Financial Sector Analysis

Contact Despite headwinds in the NBFC sector, NBFC-MFIs expected to

Rajat Bahl
Chief Analytical Officer
repeat the healthy growth recorded in FY19
+91 22 67456634
rajat.b@brickworkratings.com Microfinance Institutions (MFIs) offering financial services to low income populations recorded
healthy growth in terms of Assets Under Management (AUM) in FY19, a year when other NBFCs
Nirav Shah
Sr Rating Analyst struggled due to liquidity squeeze since September 2018. The AUM for the microfinance industry
+91 22 67456623 grew by 47 per cent y-o-y in FY19 due to an increase in client base (up by 34 per cent) coupled
nirav.s@brickworkratings.com
with disbursement of higher ticket size loans (up by 13 per cent). Deepening of penetration into
Praveen Pardeshi states like West Bengal (AUM up by 83 per cent), Bihar (AUM up by 77 per cent) and Rajasthan
Research Analyst
+91 22 67456681 (AUM up by 111 per cent), and penetrating into newer states like Assam (AUM up by 167 per
praveen.p@brickworkratings.com cent), resulted in overall growth of AUM in the industry.
Apurva Mittal
Rating Analyst
Trends in Assets under Management of NBFC-MFI (Rs crores)
+91 22 67456645 On balance sheet (Rs crores) Off balance sheet (Rs crores)
apurva.m@brickworkratings.com
Microfinance Growth y-o-y NBFC Growth y-o-y

120,000 55% 60%

100,000 47% 50%

40% - 45%
80,000 35% 68,207 40%

60,000 30%
20% 46,546
40,000 30,113 20%
25,018
19%
20,000 17% 10%
11% 12%
0 0%
March 2016 March 2017 March 2018 March 2019 March 2020 (F)

F: Forecast
Source: MFIN, BWR Research

Despite liquidity crisis faced by NBFCs, microfinance players continued to grow as the
fundamentals of the industry provides safety against such crisis. The loans given by these
players are of shorter tenures as compared to its borrowings; hence, they are less likely to suffer
from asset-liability mismatches. In addition, during FY19, MFIs raised a significant proportion of
their liabilities from securitization in order to keep its liquidity position in-check.

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October 2019
 Reeling under the shocks of demonetisation in FY17, the AUM growth slowed to 20 per cent from
35 per cent in FY 16. The growth rebounded in FY18 and the growth momentum continued in
FY19 and is expected to sustain the healthy growth in FY20 as well backed by availability of
credit, expectation of reduced interest rates and disciplined collection and recovery model. The
recent proposed increase in household income limit for eligible borrowers and a higher
permissible indebtedness of borrowers also augurs well for the growth momentum, as it will
increase the borrower base.

Microfinance loans are small ticket Expanding client base and increasing ticket size
size loans given mainly to poor in
rural, semi-urban and urban areas. The client base for the Microfinance players has increased considerably over the years. In FY19,
The loans disbursed by an MFI
the client base increased by 34 per cent y-o-y to reach 3.17 crores. The players have been able
should be to a borrower whose
rural household annual income to increase their client base by expanding into other districts of the states where they already
does not exceed Rs. 1,00,000
have their presence and also through further expanding their reach to underpenetrated states.
(proposed to increase to Rs
1,25,000) or urban and semi-
urban household income does not
exceed Rs. 1,60,000 (proposed to Trend in no. of clients and ticket size growth
increase to Rs 2,00,000). These
are unsecured loans i.e. without Client additions growth Avg disbursement per account growth
any collateral.
40%
34%
35%
30% 28%

25% 22%
20%
20%
15% 13%

10% 13%

5% 8% 9%

0%
2015-16 2016-17 2017-18 2018-19

Source: MFIN, BWR Research

Another major driver for growth of AUM has been the increase in ticket size of loans. The average
loan amount disbursed per account has gone up to Rs 25,543 in FY19 compared to Rs 15,419
in FY16. This signifies that demand for credit in rural areas has been increasing as they account
for nearly 75 per cent of the total AUM.

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October 2019
 Trend in average disbursement per account

28,000
25,543
26,000

24,000 22,567
22,000

20,000 18,818
The ticket size for loans given by 18,000
MFIs should not exceed Rs. 60,000 in
the first cycle and Rs. 1,00,000 in 16,000 15,419
subsequent cycles. The total
indebtedness of the borrower should 14,000
not exceed Rs.1,00,000 (proposed to
increase to Rs 1,25,000). 12,000

10,000
2015-16 2016-17 2017-18 2018-19

Source: MFIN, BWR Research

Expanding footprints -

Higher ticket size loans in highly penetrated states and client additions in underpenetrated states
has helped MFIs to grow their portfolio significantly. Microfinance companies have been
expanding their footprints across the country by entering into underpenetrated states like
Rajasthan, Assam, Jharkhand and Gujarat. Eastern India has been growing at a rapid pace with
AUM in states like Bihar (77 per cent), Orissa (40 per cent), West Bengal (83 per cent), Jharkhand
(53 per cent) and Assam (167 per cent) growing much faster than the overall growth rate (47 per
cent).

These five states account for almost 40 per cent of the total AUM of the sector. Lower penetration
and low credit coverage in the eastern states and a need for geographic diversification resulted
in MFIs entering these states. It has been observed that, historically low PAR levels have
encouraged more MFIs to increase their exposure in the region.

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October 2019
 State wise operational indicators
Avg
No of MFIs AUM
(As on March 2019) No of MFIs Growth (y-o-y) disbursement Growth (y-o-y)
(March 2018) (Rs crores)
per account
Karnataka 13 10 8,097 30% 22,847 9%
Bihar 32 26 7,991 77% 25,529 14%
Orissa 25 20 7,329 40% 26,208 19%
Maharashtra 26 25 6,276 35% 25,170 7%
Uttar Pradesh 25 17 6,086 30% 26,520 7%
West Bengal 19 13 5,958 83% 25,629 25%
Tamil Nadu 17 11 5,468 39% 26,775 11%
Madhya Pradesh 24 19 4,515 18% 25,846 4%
Rajasthan 21 17 2,916 111% 25,353 13%
Kerala 10 8 2,403 24% 25,840 12%
Assam 16 8 2,267 167% 25,654 3%
Jharkhand 20 14 1,887 53% 25,807 20%
Punjab 12 9 1,699 43% 26,782 7%
Chattisgarh 21 20 1,564 41% 25,304 8%
Gujarat 19 14 1,353 64% 28,150 12%
Haryana 16 13 1,184 45% 26,982 35%
Uttarakhand 11 11 326 -2% 28,148 8%
Source: MFIN, BWR Research

As microfinance players expand to these newer geographies, there will be an increased client
addition which is likely to drive future growth in these states. On the other hand, mature markets
like Bihar, Orissa and West Bengal which have historically seen growth in client additions will
now see higher ticket size of loans. Therefore, future growth is expected to be driven by client
additions in new underpenetrated geographies along with higher ticket size loans in high
penetrated states.

As microfinance sector caters to customers from the lower end of the income spectrum, increase
in the loan amount given to each borrower also increases the chances of delinquencies. The
average loan amount disbursed per account has grown by 13 per cent in FY19 and 20 per cent
in FY18. This increases the probability of default with a significant chance of customer account
overlap.

With RBI proposing to raise the lending limit per eligible borrower, average ticket size of loans is
likely to go up further and may influence the delinquencies of the MFIs. However, data of BWR
rated MFIs does not indicate the same as of now and in fact, NPAs have remained roughly the
same with collection efficiencies for 0+ days around 99.5 per cent in accounts where ticket size
has been higher.

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October 2019
 Small Finance Banks (SFBs) able to grow faster than MFI industry
in FY19
MFIs that converted into SFBs have reported robust growth in their AUM during FY19, higher
than the growth reported by the MFI sector. SFBs diversifying their loan book (other than micro
loans) and getting access to deposits are the major reasons for this growth.

Some of the players like Utkarsh, Fincare, Equitas, ESAF, and Ujjivan have seen loan portfolio
growing by more than 50 per cent in FY19. Interestingly, these players were able to garner huge
deposits (60 per cent per cent y-o-y) during the same period helping them to raise funds at a
lower cost than MFIs. Being a low cost avenue of funding, deposit mobilization is of great
significance. SFBs have been raising deposits from the market and for almost all the above banks
deposits in FY19 have crossed 70 per cent of their liabilities outstanding.

Profitability for SFBs will be under pressure in the initial years due to high operating expenses
arising from setting up and upgrade of existing branches, systems upgrade, and the hiring of
manpower. However, stabilization of such costs over the medium term and increasing deposit
base leading to lower cost of funds will result in profitability improving going forward.

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October 2019
 Asset quality to continue to remain healthy going forward
The portfolio at risk (PAR) levels of the MFI industry saw an upsurge in the year ended March
2017, with PAR>90 touching 5.88 per cent. As transactions with microfinance customers are
cash-intensive, demonetization had a strong impact on growth due to a lack of liquidity for several
months. Loan repayment took a severe hit in the cash-based sector after the government
announced note ban in November 2016 resulting in increased delinquencies for the period. This
was further aggravated by farm loan waiver announcement influencing small borrowers to stop
repaying loans.

The microfinance companies collectively wrote off about Rs 5,000 crore of loans in the first two
quarters of FY18. The PAR>90 levels subsequently came down to 3.6 per cent in March 2018
and 1.3 per cent in March 2019.

Trends in PAR
The microfinance industry is highly
8.00% PAR > 90 days One year lagged PAR
vulnerable to income shocks, political
interference and catastrophe. 7.00%
Despite these risks, the industry
historically has had low delinquencies 6.00%
as compared to banks and NBFCs as
MFIs model of lending is majorly 5.00% 5.88%
towards group lending i.e. Self Help
Groups and Joint Liability Groups. 4.00%
Hence, peer monitoring, group 3.64%
3.00%
pressure, and social ties reduce
delinquency levels in such loans.
2.00%
2.00%

1.00%
1.30% 1.00%
0.20%
0.00%
March 2016 March 2017 March 2018 March 2019 March 2020 (F)

F: Forecast
Source: MFIN, BWR Research

In FY20, PAR levels are expected to moderate further to 1.0 per cent and reach closer to the
pre-demonetization levels supported by high portfolio growth and robust collections in the
portfolio originated post demonetization. While the PAR levels in states like MP, Maharashtra
and UP which are higher than the industry average are expected to moderate, states like West
Bengal, Bihar and Orissa might see an increase in PAR levels due to steep increase in average
ticket size of loan disbursed and high competition prevailing in those states.

However, certain risks like over lending as evident from the high ticket size loans, flood like
situation witnessed in some of the states recently (Kerala, Karnataka, Maharashtra & Bihar) and
any further announcements of farm loan waiver may hamper the asset quality. These risks could
result in 2.0 per cent PAR levels in FY20 under a stress scenario.

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October 2019
 PAR levels in UP, Maharashtra & MP highest in the country
A majority of the delinquent accounts came from states like Madhya Pradesh (MP), Uttar Pradesh
(UP) and Maharashtra.

Even after loan write offs post demonetisation, UP continued with high PAR levels in FY18. State
elections in UP were held in February 2017 wherein farmers were promised loan waivers,
subsequently leading to non-repayment by the borrowers. Loan waivers have been promised in
states like Maharashtra, Chhattisgarh, Karnataka and Rajasthan as well. However, these states
did not witness a spike in delinquencies around the election period.

Another factor affecting state PAR levels are the weather conditions. For example, Maharashtra
witnessed a spike in PAR levels during the quarter ended September 2017 due to the drought
like situation, especially in Vidarbha and Marathwada regions during this period. Further, poor
credit discipline of borrowers in Maharashtra and MP has also contributed to the high PAR levels.

Thus, sensitivity to political issues, extreme weather conditions along with credit discipline of
borrowers in these states are the main reasons for high PAR levels.

PAR > 90 Days

FY17 FY18 FY19

States June'16 Sept'16 Dec'16 Mar'17 June'17 Sept'17 Dec'17 Mar'18 June'18 Sept'18 Dec'18 Mar'19

Karnataka 0.31% 0.30% 0.34% 12.00% 3.88% 3.40% 3.55% 4.00% 3.03% 1.68% 1.30% 0.91%

Bihar 0.12% 0.10% 0.12% 1.00% 0.28% 0.65% 0.77% 1.00% 0.41% 0.35% 0.28% 0.20%

Orissa 0.05% 0.05% 0.15% 0.30% 0.19% 0.40% 0.54% 1.00% 0.36% 0.34% 0.38% 0.42%

Maharashtra 0.20% 0.25% 0.40% 20.00% 13.17% 14.76% 12.63% 10.00% 7.70% 4.34% 3.33% 2.31%

Uttar 0.19% 0.36% 0.87% 14.00% 11.17% 12.58% 10.11% 11.00% 4.90% 4.56% 3.51% 2.46%
Pradesh

West Bengal 0.10% 0.12% 0.30% 4.00% 1.27% 2.35% 2.23% 1.00% 0.77% 0.51% 0.44% 0.37%

Tamil Nadu 0.13% 0.26% 0.21% 2.00% 1.15% 1.04% 1.32% 1.00% 0.94% 0.86% 0.90% 0.94%

Madhya 0.27% 0.32% 0.59% 9.00% 8.33% 8.07% 6.64% 6.00% 4.20% 2.85% 2.70% 2.54%
Pradesh

Rajasthan 0.36% 0.31% 0.56% 5.00% 2.61% 5.30% 10.39% 4.00% 1.43% 1.35% 0.90% 0.44%

Kerala 0.04% 0.05% 0.08% 1.00% 0.72% 1.32% 1.58% 3.00% 1.72% 1.71% 1.58% 1.44%

Demonetisation Period
High PAR levels
Source: MFIN, BWR Research
Red Election Period

The states that continue to see high PAR in March 2019, are the same ones where stress was
highest during the demonetisation period. Maharashtra, UP, and MP stand at 2.31 per cent, 2.46
per cent, and 2.54 per cent PAR>90 levels, respectively.

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October 2019
 Movement towards digitised transactions, a positive for the sector
The microfinance sector was one of the worst hit by demonetisation as it caters to the low income
households having low orientation towards technology. As majority consumers are unbanked or
under-banked, the transactions are largely cash-based. However, the shock of demonetisation
and awareness created by Jan Dhan Yojana on financial inclusion/bank accounts have boosted
digitisation with many microfinance institutions preferring disbursements through the cashless
mode.

Almost 85 per cent of the loan amount disbursed was through the cashless mode in the last
quarter of FY19. In FY19, of the 44 members of MFIN, almost 24 MFIs reported more than 50
per cent cashless disbursements. Though, disbursements are getting digitised, collections are
still largely cash based.

MFIs remained immune to funding

shocks as these companies are
Funds continued to flow in the MFI space despite liquidity crunch
largely dependent on bank
borrowings for their funding
for other NBFCs
requirements and have no asset- The major sources of debt funding for MFIs are either Banks or Other Financial Institutions
liability mismatches.
(majorly NBFCs). Almost 64 per cent of the MFI borrowings in FY19 is through banks. Despite
NBFCs reeling under liquidity crunch, MFIs continued to get bank funding. As MFIs lend small
ticket loans of short tenure vis-a-vis the NBFCs, asset-liability mismatch (ALM) is not a risk for
the former. Moreover, as lending to MFIs fulfils the priority sector lending requirements for banks,
they prefer lending to MFIs as compared to other NBFCs.

Sources of borrowings for MFIs

Banks Other FIs

40% 39% 39% 36%

60% 61% 61% 64%

2015-16 2016-17 2017-18 2018-19

Source: MFIN, BWR Research

Small MFIs have faced challenges in raising funds in the previous fiscal, as these entities were
dependent on larger NBFCs for funding. With the liquidity crisis that hit the NBFC sector in 2018,
fund flow from some major players dried up. As a consequence, several small microfinance
institutions have started working as business correspondents – partly or fully, wherein these
entities originate loans on behalf of their partner banks. Alternatively, some of the MFI players

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October 2019
 have consolidated with larger NBFCs or banks, securitization has also became an additional
source of funding to the sector, has grown 3 times during FY19.

Trends in off-balance sheet portfolio (Rs crores)

(Rs crores) BC portfolio Securitised

25,000
21,584

20,000

15,000 14,226
9,087
10,000
5,464
5,884
5,000
2,948 7,358
2,516 3,203
-
Mar-17 Mar-18 Mar-19

Source: MFIN, BWR Research

Profitability improving with stability returning to the operations

MFIs profitability has been steadily improving over the years. With more funds flowing into the
sector, the average cost of funds has been gradually declining.

Profitability Indicators

2015-16 2016-17 2017-18 2018-19 2019-20 (F)

Interest earned 19.3% 19.5% 19.4% 18.7% 18.7%
Interest expended 9.2% 9.6% 8.5% 7.3% 7.1%
Net Interest Margin 10.1% 9.9% 10.9% 11.5% 11.6%
Operating expenses 6.7% 8.5% 6.5% 6.2% 6.0%
Other income 2.3% 2.6% 1.4% 2.5% 2.0%
Provisions for NPAs 0.2% 1.4% 1.6% 0.7% 0.7%
Net Profitability Margin 5.4% 2.5% 4.3% 7.0% 6.9%
Return on Managed Assets 2.4% 1.7% 2.3% 3.6%

Note: The above indicators are based on the financials of Top 7 players in the MFI space
accounting for close to 70 per cent of the overall portfolio of the industry.
Above figures are a percentage of AUM
F: Forecast
Source: Company Filings, BWR Research

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October 2019
 Employee cost and interest cost are the two major expenses for the sector. Better efficiency has
helped MFIs reduce their operating expenditure. The average portfolio handled by a loan officer
has grown by 15 per cent in FY19. As of FY19, a loan officer caters to 488 clients, on an average
basis. The average portfolio handled per branch has grown by 12 per cent in FY19. On an
average, a branch caters to 2584 clients as of FY19. A subsequent increase in this number for
the coming financial years may further improve the efficiencies of loan officers. On the other
hand, credit costs seems to be the only component that may hamper the profitability going
forward.

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October 2019
 Annexure –

Top 20 MFIs by AUM

AUM Growth Revenue Net Profit Gearing

Name of MFI Gross NPA
(Rs crores) (y-o-y) (Rs crores) (Rs crores) (times)
Bharat Financial Inclusion Ltd 17,394 38% 0.8% 3,037 985 1.4
CreditAccess Grameen Ltd 7,159 44% 0.6% 1,281 322 2.1
Satin Creditcare Network Ltd 6,374 48% 2.9% 1,373 195 4.8
Arohan Financial Services Ltd* 4,045 86% 1.3% 322 30 5.0
Spandana Sphoorty Financial Ltd 3,166 0% 2.1% 1,036 309 1.6
Annapurna Finance Pvt. Ltd 3,018 54% 2.1% 505 58 2.5
Muthoot Microfin Ltd 2,920 0% 2.0% 750 201 4.6
Fusion Microfinance Pvt Ltd 2,641 69% 1.4% 486 65 4.3
Samasta Microfinance Ltd* 2,286 172% 0.3% 96 3 4.7
Madura Microfinance Ltd 1,957 65% 0.0% 375 81 1.7
Belstar Microfinance Pvt Ltd 1,841 62% 0.8% 367 73 3.7
Sonata Microfinance 1,441 5% 2.7% 272 19 3.5
Svatantra Microfin Pvt Ltd* 1,232 116% 3.7% 75 -10 4.1
Vaya Finserv 1,110 61% 0.0% 49 4 2.7
Village Financial Services 1,053 45% 0.6% 112 9 5.3
ASA International India Microfinance Ltd* 1,036 - 0.6% 127 20 4.1
Share Microfin Ltd* 788 2% 2.4% 206 6 4.2
SV CreditLine Ltd 747 -14% 2.0% 141 6 3.7
Satya Microcapital Ltd 622 184% 0.0% 87 3 6.1
Chaitanya India Fin Credit Pvt Ltd 572 60% 5.4% 111 7 3.6

Note: AUM data is as on March 2019

* Data is for FY18, rest all data is for FY19
Source: MFIN, Company Report, BWR Research

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October 2019
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