Hela April 30, 2019

Financial-District-Getty-12Kolkata: Capital requirement for microfinance firms may shrink in the next few years, with many of them adopting new business models requiring less capital.

Several smaller microfinance institutions or MFIs have started working as business correspondents – partly or fully, wherein these entities originate loans on behalf of their partner banks, to conserve capital. Raising capital has been the key challenge for most small and medium sized entities.

“Alternatively, there could be some further consolidation in the industry with the smaller MFIs being acquired by larger NBFCs or banks,” rating company ICRANSE -0.50 % said.

It has projected Rs 3500-4700 crore of capital requirement for MFIs and small finance banks together over the next three years to maintain 25-30% annual growth. This is in comparison to Rs 4350 crore equity expansion by MFIs in FY19. More than 90% of the capital raised in FY2019 was by the MFIs with asset under management of more than Rs 1,000 crore. Investors pumped in about Rs 4100 crore in FY18.

“Larger entities have been able to attract capital while the smaller less-diversified entities continue to struggle on this front,” ICRA said Tuesday.

MFIs with less than Rs 500 crore assets under management have faced challenges in raising both equity capital and debt, as these entities were more dependent on larger NBFCs for funding. Fund flow for them had dried up immediately after the IL&FS-led liquidity crisis, hampering their business in October and November last year. The cost of funds for the MFIs may remain at elevated levels till the systemic liquidity improves.

MFIs across the spectrum resorted to increased securitisation of portfolios and further enhanced their business correspondent relationships.

ICRA estimated that NBFC-MFIs raised around Rs 26,200 crore through securitisation of micro loan pools in FY19, which was nearly three times over Rs 9,700 crore quantum witnessed in FY18.

The sector grew 28% during the 12 months ended December 2018 as against 26% in FY2018 and has despite trouble in the third quarter. The overall micro loan market size (including SHG Bank linkage programme) was Rs 2.37 lakh crore as on December 31, 2018.

The portfolio quality of MFIs has improved during this period with portfolio at risk for less than 30 days fell to 0.99% as on September last year.