 |
|
The Indian microfinance sector experienced significant growth in loan disbursal over the past three years, according to a recent report by IIFL Capital. The average ticket size for Micro Finance Institutions (MFIs) loans increased by 43 percent, rising from Rs 35,000 to Rs 50,000 between September 2021 and 2024. This substantial increase reflects a growing demand for credit within the microfinance segment, potentially fueled by economic activity and increased access to financial services. However, this positive trend is accompanied by a concerning rise in delinquencies, particularly among borrowers with multiple loans and higher credit exposure. The report highlights that nearly half of those taking unsecured loans already hold another live retail loan, often a larger one, signifying a potentially unsustainable level of debt accumulation among a significant portion of the borrower base. This over-leveraging contributes to a rising rate of loan defaults and impaired assets, potentially threatening the stability of the sector.
The IIFL Capital report further details the alarming level of multiple borrowing among borrowers. Approximately 11 percent of individuals with personal loans exceeding Rs 50,000 had overdue payments, while over 60 percent had taken out more than three loans during the fiscal year to date. This data underscores the risks associated with unsecured lending and the potential for financial distress among borrowers struggling to manage their multiple debt obligations. The concentration of multiple loan burdens also demonstrates the need for more robust credit assessment and risk management practices within the MFI sector to better evaluate the repayment capacity of borrowers and to prevent excessive debt accumulation. The rising impairment rates on unsecured loans serve as a clear indication of the inherent risks associated with this trend. In response to this, lenders have begun tightening their credit policies, reflected in lower inquiry volumes, stricter approval rates, increased focus on prime borrowers, and a reduced offering of personal loans to lower-income groups.
Beyond the challenges within the MFI sector, the broader Indian banking landscape shows signs of strength according to the IIFL Capital report. In FY2024, banks opened a record number of 5,400 branches, with a significant proportion (42 percent) located in smaller centers with populations under 50,000. Private banks spearheaded this expansion, opening roughly two-thirds of the new branches, with a focus on underserved rural areas. This demonstrates a concerted effort to increase financial inclusion and access to credit across the country. The report also indicates that the gap between loans and deposits has narrowed, with both experiencing year-over-year growth of 11.5 percent. The loan-to-deposit ratio (LDR), a key indicator of bank liquidity, has stabilized at around 80 percent, suggesting a more balanced approach to lending and deposit management. The continued expansion of retail lending, which accounts for the vast majority of incremental credit growth, underlines the strong performance of this sector within the Indian economy. Private banks, showing a remarkable capacity to attract deposits, experienced deposit and CASA (Current Account Savings Account) growth 1.7 to 2 times higher than their public sector counterparts.
The IIFL Capital report paints a picture of a resilient Indian banking sector, boasting a healthy 14 percent compound annual growth rate (CAGR) in loans over the past three years. Furthermore, the non-performing asset (NPA) ratio stands at a 12-year low, reflecting prudent lending practices and robust asset quality. The provisioning coverage ratio (PCR) has improved by 10 percentage points, demonstrating a greater capacity to absorb potential loan losses. Capital ratios have also increased by 50 basis points, enhancing the financial strength and stability of the banking system. Return on assets (RoA) has improved by 70 basis points since FY21, indicating higher profitability and efficiency. These robust financial indicators suggest that Indian banks are well-capitalized and prepared to navigate potential economic challenges. While the report acknowledges that NPAs have bottomed out and slippages are rising, coupled with a slowdown in upgrades and recoveries, the overall assessment remains positive, indicating that the Indian banking sector is well-positioned for continued growth and stability. The continued health of India Inc. contributes further to this positive outlook, with healthy profitability and improving debt serviceability.
In conclusion, the IIFL Capital report provides a mixed but overall positive outlook on the Indian financial landscape. While the significant growth in MFI loan disbursal presents considerable opportunities, the rising delinquency rates and multiple borrowing amongst borrowers highlight crucial risk management challenges that require immediate attention. Simultaneously, the impressive performance of Indian banks, characterized by strong financial metrics and continued expansion, underscores the underlying resilience of the Indian financial system. The report serves as a reminder that while significant progress has been made, sustained vigilance and proactive risk management are essential to ensure the long-term health and stability of the financial sector and to support the sustainable growth of the Indian economy.
Source: Loan disbursal to Micro-Finance Institutions rises 43% over 3 years: IIFL Capital