Growth in client base to drive MFI loan portfolio

{Rs bn)
6,000
R 5,058
5,000 6th CASI
4,000 parechoR 3518
abo oo 804
Ce 154
2,000 1,708
™ i [|
FYI7 FY18 FY19 FY23P

E Estimated, P- Projected

‘Note: Graph includes data for bank lending through joint liability group, bank lending through self-help groups, SFEs, NEFC-MFls, other NBFCs
and non-profit MFIs;

‘Source: MFIN, Company reports, CRISIL Research

However, over the subsequent two fiscals, the domestic microfinance industry is expected to gain momentum. Between
Fiscal 2020 and 2023, the MFI loan portfolio is expected to grow at a CAGR of 16%. While considerably lower compared
with the past three fiscal years, growth would be driven by continuous expansion in the client base of MFIs and also
healthy penetration in rural areas, where MFI presence is much lower compared with urban areas.

Growth in the MFI business is expected to be driven by increasing presence in newer states, expanding the client base,
and gradual increase of the ticket size. There has been a significant increase in the number of MFIs operating in Assam,
Bihar, Odisha, and West Bengal. The presence of several credit bureaus ensures that MFIs have access to more data on
borrowers, helping them make informed lending decisions.

Players tapping newer states and districts to widen client base

In the last three years, many MFIs have opened branches in untapped districts to increase their penetration. This has led
to a rise in customer base and number of active loan accounts. In states where the presence of MFIs and banks is strong,
there has been an increase in ticket size as well.

Average ticket size to expand, but at slower pace

The average ticket size of MFIs increased in March 2020 to % 30,250 from % 23,586 in March 2018, a CAGR of 13%.
The ticket size increased in highly penetrated states where MFIs have been present for a long period and credit-worthiness
of the client base is relatively well-established.

Going forward, MFI growth is expected to be higher in newer under-penetrated states, but ticket size in the states is
expected to be lower. Further, growth is expected to be faster in rural areas, where ticket sizes are relatively low.
Consequently, increase in average ticket size at the industry level is projected to be much lower than in the past.

Challenges in rural-focused business

The microfinance industry mainly caters to the economically backward section of society, giving rise to certain inherent
challenges that are faced by the institutions, particularly in rural areas. These include: (i) higher costs of customer
acquisition due to remote locations and sparsely populated regions; (ii) lack of financial awareness as considerable effort
is spent in educating the population on the benefits of financial inclusion; (iii) vulnerability of households’ income to
local developments; and (iv) high proportion of cash collections giving rise to increased time spent involved in
reconciliation, risks in handling cash, and higher turn-around-times from the financier’s perspective.

Asset quality

Asset quality of banks, SFBs better than industry; NBFC-MFIs worse off

PAR, the primary indicator of risk for the sector, represents the portion of loans overdue. PAR value increased sharply in
Fiscal 2017 due to unavailability of cash and slowdown in business activity of individuals post demonetisation.

Misinterpretation by borrowers of the RBI’s norms on recognition of GNPAs to financiers as well as for loan waivers,
and local level political intervention in some states led to lower collections.

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