Rapid growth of MFIs’ gross loan portfolio sets alarm bells ringing

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Microfinance companies extended heavier loans to their customers in the last financial year, data showed, raising concerns the sector that emerged from a crisis not far ago may be growing too fast yet again for its own good.

The loan portfolio of microfinance institutions (MFIs) stood atRs.53,233 crore as of 31 March 2016, up from Rs.28,940 crore a year ago, according to data from the Microfinance Institutions Network (MFIN), a self-regulatory organization for the industry. However, this 84% jump in loans comes against a much more modest 44% increase in the number of clients, suggesting the average loan per customer is on the rise.

The number of branches and employees too have grown much slower during the year, at 22% and 36% respectively.

Ratna Vishwanathan, chief executive officer of MFIN, linked the loan growth to the increase in client base and income levels.

“Client base has increased by 44%, which is balancing out the increase in loan book. Also, general income levels have increased which led to such a high growth pattern,” said Vishwanathan.

Alok Prasad, a former chief executive officer at MFIN, did not agree.

“Even if income levels are up, the jump is not enough to explain an 84% growth in the gross loan portfolio,” he said, adding the growth rates may be “something to worry about”.

Prasad said the MFI sector, which shrank after the Andhra Pradesh microfinance crisis of 2010, regained momentum only after new rules from the Reserve Bank of India (RBI).

In October 2010, following allegations that aggressive loan recovery tactics of MFIs in Andhra Pradesh had driven many borrowers to suicide, the state government promulgated an ordinance to curb MFI activities, sending ripples across the country.

Bad loans piled up as borrowers refused to pay back and banks declined to give loans to MFIs. In December 2011, RBI announced new regulations for the industry.

“Growth is a function of individual institutions and good leadership. But such high levels of growth is absolutely worrisome. Compared to the client base growth, the loan book growth is much higher, indicating more money is given to the same client, which is a risky situation,” said Prasad.

The institutions that have seen the sharpest increase in their gross loan books are among the largest in the sector. Some are in the process of converting to small finance banks after receiving RBI’s in-principle approval last year.

Janalakshmi Financial Services saw its client base nearly double, but its gross loan portfolio grew at a pace that was nearly double the growth in its client base.

Bharat Financial Inclusion Ltd (formerly known as SKS Microfinance) reported an 84% growth in the gross loan portfolio on a 27% growth in its client base. Grameen Kota Financial Services Pvt. Ltd and Equitas Holdings saw their portfolios grow by 75% and 53% respectively. Among the larger firms, Ujjivan Financial Services saw the most conservative growth at just under 25%.

Emails sent to Ujjivan, Janalakshmi, SKS and Grameen Kota on Thursday went unanswered. P. N. Vasudevan, managing director of Equitas, said the increase in loan portfolio was because of an increase in the ticket size of loans.

One possible reason for the increase in ticket size of loans is a change in lending rules.

In April 2015, RBI eased rules for MFIs, raising total indebtedness limit of a borrower to Rs.1 lakh, double the previous limit of Rs.50,000. This allows lenders to give out more loans to the same customers. The new rules state that MFIs can disburse loans to a borrower with a rural household annual income of Rs.100,000 as compared with the earlier limit of Rs.60,000. In case of customers in the urban or semi-urban regions, the annual income limit has been raised to Rs.160,000 from Rs.120,000 earlier. In the first disbursement cycle of the loan, MFIs can give up to Rs.60,000 out of the total loan amount. This limit was fixed at Rs.35,000 earlier. In subsequent cycles, the companies can now disburse up to Rs.100,000 as compared with Rs.50,000 earlier.

Low levels of penetration have aided rapid growth, said a bank official familiar with the microfinance segment.

“Market penetration is low which gives huge potential to grow. Current growth is aggressive; however, if we compare the pre-crisis days and today’s situation, there are positive developments such as more responsible lending and a wider geographical spread,” said this official requesting anonymity, as he is not allowed to speak to the media.

The official, however, cautioned that MFIs still serve the most vulnerable sections of society, meaning the underlying risk remains high.

P. Satish, executive director of Sa-Dhan, the second self regulatory body for the microfinance sector along with MFIN, pointed to some other likely factors.

“A large part of the growth is accounted for by bigger MFIs who are on their way to becoming small finance banks, though growth shouldn’t come at the cost of neglecting loan procedures. Also, since banks have to fulfil priority sector lending norms, they give loans to big MFIs which are further given to small borrowers, thus helping banks meet their regulatory requirements,” said Satish.

To be sure, credit quality of the MFI loan portfolio remains steady, and has shown no significant uptick in delinquencies.

The percentage of the portfolio overdue for 30-180 days is at 0.25% for rural areas and at 0.33% for urban areas, according to Kalpana Pandey, managing director and chief executive officer of Crif High Mark Credit Information Services, a credit bureau.

Pandey said that however, “more borrowers serviced two or more loans during the year”—one of the reasons for growth in the loan portfolio. MFIN data show that 64% of loans were given for non-agriculture activities. In terms of the regional distribution of the loan portfolio, the south accounts for 35%, east 15%, north 25% and west 25%.