ICRA RESEARCH SERVICES

Financial Sector Ratings Contacts: ICRA RATING FEATURE Rohit Inamdar [email protected] 0124-4545847

Credit Quality Trends in Retail Loans

Karthik Srinivasan [email protected] 022-61143444 Supreeta Nijjar [email protected] 0124-4545324

Rising concerns about MFI asset quality post demonetisation

Remika Agarwal [email protected] 080-49225504 Devang Rajkotia [email protected] 022-61143434 Mohit Gupta [email protected] 022-61143449 Rahul Gupta [email protected] 022-61143438

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ICRA – Microfinance EXECUTIVE SUMMARY Sharp decline in collection efficiencies lead The Rs. 55,000 crore NBFC-MFI sector had displayed strong asset quality till recently, with the share of overdue loans [0+ days to rise in shorter bucket delinquencies past due (dpd)] in the total loan portfolio being lower than 1% as on September 30, 2016. However, the Government of India’s demonetisation action of November 2016 has brought to the forefront several long-standing concerns in the sector, viz, high pace of growth, overleveraging of borrowers, potential dilution in the rigour of the lending process and the possibility of loans being used for consumption rather than for income generation. In the aftermath of demonetization, inadequate currency supply, political interference in some states, and disruption in borrower cash flows led to a sharp dip in MFIs’ collection efficiencies (~75-80 % in November and December 2016 from earlier levels of over 99%). The median 0+ dpd for MFIs have increased to 19% as on December 31, 2016. ICRA has also noticed that there is some link between the districts reporting low collection efficiencies post the demonetisation event with inherent overleveraging issues in some of the areas, pipelining as well as upcoming elections which suggests the lower collection efficiencies were also not only caused by low currency supply but also the other prevailing concerns in the sector. Therefore, demonetisation has brought to the forefront certain long standing concerns the sector has been facing, high pace of growth, concerns over the quality of growth, overleveraging of borrowers, and potential dilution in the rigour associated with micro-lending and the possibility of more loans being used for consumption than for income generation. These concerns are enhanced by the reported instances of borrower suicides, pipelining, multiple loans and overleveraging in small geographies in various states. Although the incidence of such violations has been low so far, it nevertheless flags questions about the long term sustainability of asset quality of MFIs. This ICRA report discusses the impact of demonetisation on MFIs credit profiles, other concern plaguing for the Indian Microfinance sectors which pose a threat to long term asset quality and the protective factors.

ICRA Research

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ICRA – Microfinance High pace of growth; quality of growth a concern

Chart 1: Overall size of the microfinance market

2,000

80%

70%

Rs billion

1,500

60% 50%

1,000

40% 30%

500

20% 10%

-

0% Mar-14

Mar-15

Mar-16

As per ICRA’s estimates, the size of the Indian Microfinance sector was around Rs 1.6 trillion as on September 30, 2016, with a reported annualised growth of 30% in H1FY2017. The growth for MFIs, banks and small finance banks (SFBs) together was even higher at 43% (annualised). The growth in the sector was supported by new entrants, increase in client outreach as well as higher loan ticket sizes. Albeit, the growth story changed post demonetisation with fresh disbursements slowing down to a trickle in November 2016 and slowly inching up in December 2016.

Sep-16

SHG Bank Linkage Programme

Banks, SFBs, MFIs

Growth- Banks,SFBs, MFIs (RHS)

Growth -Overall (RHS)

Source: Basic Statistical Returns (RBI), Status of Microfinance in India (NABARD), Financials of various MFIs, MFIN Micrometer, ICRA Research High penetration in some states

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This report provides detailed estimates of MFI loan penetration at state and district levels. ICRA’s state-level analysis1 reveals that states and UTs such as Karnataka, Tamil Nadu, Puducherry and Kerala have a high level of microcredit penetration covering over 50% of the addressable target population. On the other hand, some large states like Uttar Pradesh and Rajasthan and the North Eastern states have a high share of untapped market with potential for further growth. Nevertheless, portfolio growth rates continue to be in excess of 50% even in the highly penetrated states. While MFIs operate across almost all states of the country, Karnataka, Tamil Nadu, Maharashtra and Uttar Pradesh together constitute close to 49% of the industry’s total gross loan portfolio outstanding as on September 30, 2016 indicating material geographical concentration in the loan portfolios of MFIs.

ICRA has estimated state-wise penetration taking in account the number of existing microcredit borrowers and the addressable target segments for NBFC MFIs.

ICRA Research

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ICRA – Microfinance Chart 2: District wise break-up of portfolio of MFIs District-level penetration skewed even more Top 1 District, 4% Top 5 Districts, 10% Top 10 Districts, 16% Top 20 Districts, 25% Top 50 Districts, 44% Top 100 Districts, 63% Total (539 districts), 100%

ICRA has developed an ‘MFI Competition Index’ that reflects the intensity of competition between NBFC MFIs across districts. MFI Competition Index is defined as the number of NBFC-MFIs operating in a district per 1 lakh borrowers. ICRA found that around 20 districts in central India including eastern Maharashtra, eastern Madhya Pradesh and western Chhattisgarh have high level of MFI concentration. Of these 20 districts, some of these reported instances of by political interference and low collection efficiencies post the demonetisation event. It appears that the low collection efficiency in these districts was a consequence of both low currency supply and inherent overleveraging prevalent in these areas.

Source, MFIs, ICRA Research

District-wise portfolio analysis as of September 2016, indicates that the top 20 districts account for 25% of the overall gross loan portfolio with the remaining 75% being distributed across over 500 districts, indicating a highly skewed portfolio mix of MFIs across the country. ICRA believes that intensive competition more often than not leads to a dilution in lending norms and overleveraging of the borrowers. Also, retention of customers becomes difficult with the availability of multiple options of borrowers. ICRA’s analysis of the top 20 MFIs indicates that the proportion of their portfolio in top 10 districts in relation to net-worth was above 1 for eighteen MFIs, indicating highly localised geographic concentration. MFIs with geographically concentrated portfolios are likely to be more vulnerable to internal and external shocks.

ICRA Research

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ICRA – Microfinance Rising borrower attrition rates indicating high competition

Chart 3: Loan cycle wise break-up of portfolio for MFIs 10.5% 8.6%

35.7%

21.8% 15.3% 19.1% 59.1% 30.0%

Mar-14 1 Loan Cycle

Sep-16 2 Loan Cycle

3 Loan Cycle

>=4 Loan Cycle

Chart 4: Ticket size wise break-up of portfolio for MFIs Rising debt burden for borrowers 12%

47% 42%

37% 36% 15% 2% 1% Sep-16

7% 2% Mar-14

Upto 5000

>5000 and =10000

>15000 and 25000

>10000 and