The microfinance industry is expected to continue its robust growth momentum in FY24 with strong double-digit growth.

The microfinance industry experienced a slowdown in growth in FY21 due to the challenges posed by the Covid-19 pandemic. However, growth rebounded in the past two fiscals and the industry recorded a growth of 37 per cent, supported by an improving macro-economic environment.

Consequently, NBFC-MFIs have surpassed banks in the overall microfinancing landscape, constituting about 40 per cent of the total outstanding microfinance loans as of March 31, 2023, compared to 34 per cent for banks, says a report of CareEdge.

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The growth momentum is expected to continue and the industry may record healthy loan growth of about 28 per cent in FY24 for NBFC-MFIs, it adds.

The removal of the lending rate cap by the Reserve Bank of India (RBI) has enabled MFIs to engage in risk-based pricing, which has boosted net interest margins (NIMs) and, in turn, increased returns on total assets (RoTA). The net interest margins of NBFC-MFIs increased to 10.1 per cent in FY23, when compared with 9 per cent in FY21 and FY22.

Credit costs

Credit costs have declined from their peak in FY21 but remain higher than pre-Covid levels, with a portion of the restructured book slipping into NPA. NIMs will continue to see improvements, resulting in RoTA rising to about 3.8 per cent for FY 2024, aided by controlled credit costs of about 2.5 per cent for the same year.

Asset quality, although on an improving trend, still remains moderate when compared with the pre-Covid level owing to additional slippages arising from the restructured portfolio.

In terms of capital structure, NBFC-MFIs have managed to raise about ₹3,000 crore of equity in FY23, when compared with ₹1,500 crore and ₹1,430 crore in FY21 and FY22, respectively, indicating a renewed interest from investors.

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However, increasing customer indebtedness, rising average ticket size, and a gradual shift from the Joint Liability Group model to individual loans pose the risk of overleveraging for the industry.

Also, considering the inherent nature of its asset class, NBFC MFIs are highly prone to event-based risks, such as political, geographical uncertainty and susceptibility to natural calamities. Moreover, the evolving global macroeconomic environment and the continuation of support from impact funds and PE investors at the same pace will also be critical and needs to be closely monitored.

Bihar, Tamil Nadu, Uttar Pradesh, Karnataka and West Bengal were the top five States in terms of assets under management with Bihar leading the sector with around 15 per cent market share as on December 31, 2022.