Loan sales rise, collections improve; Inflation a major risk for microfinance sector, says report

Microfinance players (MFIs) have already come out of the brunt of the pandemic and are likely to report lower credit costs by the end of this financial year as growth picks up, says a report.

India Ratings expects the sector to register high double digit growth of 20-30 per cent due to improvement in collection and disbursement.

It expects to increase credit cost from 1.5-5 per cent to 1-3 per cent this fiscal.

According to India Ratings Inflation and elections are the two key risks for the microfinance sector over the next 12-18 months. This may impact the cash flow of borrowers in FY24 and in the first half of financial year 2024-25, it said.

The agency has revised the outlook on the microfinance sector to ‘improve’ from ‘neutral’ and also maintained ‘stable’ rating outlook for FY24.

Cautioning that inflation could be a potential risk for the sector, it said that more than 65 per cent of MFI borrowers are employed in essential goods and services sectors and hence inflation could positively impact their cash flows.

But this also has an effect on their spending and hence the combined effect may not be certain.

It expects the growth momentum to continue in FY24 as disbursements pick up, leading to higher growth.

The report said that MFIs incurred a cumulative loan cost (loan cost to average AUM) of 11.1 per cent over FY21-H1 FY23 as nearly 9 million borrowers were in default due to the pandemic.

However, it expects defaults and loan costs to normalize, as the bulk of the portfolio is now based on post-pandemic disbursements and collection capacity continues to improve at consolidated levels.

The sector will continue to grow between 20 to 30 per cent in FY 2023-24, as MFIs may see an increase in the proportion of borrowers in FY 24 due to a reduction in the impact of the pandemic.

(With PTI inputs)

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