ICRA sees better days ahead for MFIs as credit flow, markets rise

The micro finance sector, which grew 33 per cent last fiscal is likely to maintain the growth momentum in 2014-15 and see improvement in profitability, says credit rating agency Icra.

A 37 per cent growth in the number of active borrowers and an 8 per cent growth in ticket sizes had pushed up advances from MFIs by 33 per cent in 2013-14. Growth would have been higher at 48 per cent had it not been for exclusion of MFIs admitted to corporate debt recast cell, Icra said.

However, the agency sees the industry faring better going forward as there is a vast untapped potential that will help MFIs expand faster. This will help them drive in a 30-35 per cent annual growth over the next three years.

MFIs reported over 40 per cent growth during the past two years ended March 2014, after a period of stress post the crisis in the sector following a clamp down on the players in Andhra Pradesh to rein in their strong-arm recovery tactics that had allegedly led to a spate of suicides.

"The potential size of the micro finance market, served primarily by MFIs and self-help groups with bank linkages, is estimated at Rs 1.4-2.5 trillion against the current market size of around Rs 0.7 trillion as of March 2014, which points to a large growth potential.

"It is possible for MFIs to grow at an annualised growth of 30-35 per cent over the next three years on the strength of improved credit availability," Icra said.

During FY'14, many MFIs raised funds through debt issues even as bank credit improved. This led to a moderation of around 75 bps in funding costs. Icra expects credit availability to remain good for the sector this fiscal, and the cost of funds see some further moderation as the MFIs credit profiles improve.

Over the past two years, networth of MFIs rose by Rs 1,700 crore, around 40 per cent of which came from internal capital generation and the rest came from external equity.

External equity needs of the players over the medium term stands at a relatively large Rs 4,865 crore, said Icra.

Asset quality indicators of non-CDR MFIs remained stable during FY'14, resulting in relatively low credit cost, which stood at 0.24 per cent for non-CDR players.

The return on equity for non-CDR players, excluding Bandhan and SKS, improved from 9 per cent in FY'13 to 14 per cent last fiscal due to lower operating expenses and credit costs. Icra expects this to go up to 15-17 per cent as operating expenses moderate further going forward.

The credit rating agency also said its expects investor confidence, and credit flow to the sector to improve going forward.

With the Reserve Bank earlier this month recognising the Microfinance Institutions Network as the first SRO (self- regulatory organisation) will further boost the overall growth of the sector, as this will help a large number of NBFCs lending to NFIs obtain the MFIN registration.

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