Microfinance reaching less than 20% of potential household: Equifax’s Manu Sehgal

Reaching to last mile borrowers is going to be the key to NBFC-MFIs future growth, holds Manu Sehgal, Business Development Leader, Equifax

September 18, 2019

ETRise | By Shariq Khan


Equifax, a global data analytics and technology company, and Small Industries Development Bank of India (SIDBI) recently came together to launch ‘Microfinance Pulse’ – a newsletter to track the lending trends in the country's microfinance landscape. The newsletter reported that Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) continue to maintain their market dominance with a market share of 38% in Q3-FY19 and a robust 24% YoY growth. Manu Sehgal, Business Development Leader,  Equifax, spoke to ET to discuss the latest trends concerning Microfinance Institutions (MFIs) and much more. Edited excerpts:


Economic Times (ET): The latest SIDBI-Equifax newsletter reported that NBFC-MFIs continue to maintain its market dominance with the market share of 38 % in Q3-FY19. How optimistic are you about the segment's growth in the future, and what factors will be instrumental in its growth?

Manu Sehgal (MS): We believe that in the coming times, there will be some structural adjustments in the market share of the NBFC-MFIs primarily due to consolidation in the industry whereby the market share of some NBFC-MFIs who have been acquired by banks, will start getting reported under the banks' category. Having said that, organic growth for NBFC MFIs will continue. Large addressable households’ market, geographical expansion and a clear competitive advantage in reaching out to last-mile borrowers will be instrumental in the growth of NBFC MFIs.


ET: As per the latest newsletter, loan disbursal in terms of volume grew by 20% in FY19 compared to FY18. NBFC-MFIs have sourced the highest loans across all categories of lenders. What has led to such growth?

MS: Historically, NBFC-MFIs have the largest share in MFI disbursements by volumes, and this dominance continued in the last financial year. One key reason is that NBFC-MFIs account for the largest number of institutions compared with other categories of lenders. So they have the largest outreach in terms of branches, clients, employees to source loans. Banks, on the other hand, have shown the largest YoY growth both for volume and value of loans sourced in the last financial year.


ET: 30+ delinquency for NBFCs at 2.5% is the highest in the industry in Q3 FY19. Do you see this improving?
We believe that 90+ delinquency is a better barometer to track the health of the MFI industry. 90+ delinquencies for NBFCs was at 0.8% in Q3FY19. Though it is still the worst of all segments, it is not alarming. Except for a blip in the Q3FY19, overall delinquency trends are on a downward trajectory.


ET: Delinquency level witnessed improvement across all the DPD (Days Past Due) buckets. PAR (1-29 DPD), which indicates the early delinquency rates, has reduced from 4.74% in March 2017 to 1.40% in March 2019. What does it say about the changing psyche of borrowers? Are they becoming more conscious of their credit profiles?

MS: The high delinquencies in March 2017 were due to demonetization. The reduced delinquencies in March 2019 are an indicator of the resilience of the MFI sector, which has bounced back from the event induced risk. As the effect of demonetization normalised over a period of time, delinquencies also returned to the normal state.


ET: While the Microfinance industry has a presence in 619 districts in India, top 30 districts comprise 25% of portfolio outstanding whereas 213 districts contribute 80% of the portfolio. The market share of the top 10 states in portfolio outstanding is 83% in March 2019. What does this uneven distribution say about the financial standing of the residents living in those states?

MS: The uneven distribution has its origin in where the MFI industry and large players started their operations from, with those states having the largest portfolio. Having said that, there is a case of MFI industry to deepen its outreach and reduce geographic concentration within the country. NBFC MFIs, as a category, has done better in this than any other category of lenders.

The outreach concentration can be evened out with policy level initiatives such as SIDBI initiative to transform 115 aspirational districts that have seen the least progress on certain developmental parameters. Equifax can enable this process by presenting industry level trends that can help policymakers and practitioners develop their strategy accordingly.


ET: Experts say, in the long term, MFIs should either have a plan to merge with a bank or become small finance banks themselves. How do you see the future roadmap for MFIs in the country?

MS: As per Microfinance Institutions Network (MFIN) estimates, microfinance currently reaches less than 20% of potential households. So, there is still a large gap to be met in terms of the reach of microfinance for financial inclusion purposes. Banks have limitations in terms of making available last-mile access to credit. NBFC MFIs have fulfilled that role satisfactorily till now and will continue to do so in the medium term.


ET: Microcredit is recognised as one of the most effective ways of financial inclusion and alleviation of poverty. Do you find the policies of the central government and various states to be pro-MFIs?

MS: Policymaking and regulation must evolve with the industries on ground realities and new business models. MFI Industry has expressed concerns about the lack of comprehensive credit appraisal of MFI borrowers due to unavailability of complete Self-Help Group (SHG) data with credit bureaus. Recent SC judgment restricting usage of Aadhaar, which was the primary KYC document for the MFI industry is another area of concern. Appropriate regulations to address the above two will enable the effective financial inclusion with prudent risk management.


ET: Do you find the concerns raised by RBI over a spike in non-performing assets (NPAs) in the Pradhan Mantri Mudra Yojana valid?
Mudra loans are not tagged in the data received by credit bureaus. Hence, we do not have enough information to comment on this.


Link to the interview :- https://economictimes.indiatimes.com/small-biz/sme-sector/microfinance-reaching-less-than-20-of-potential-household-equifaxs-manu-sehgal/articleshow/71179207.cms