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Micro-finance sector need Rs 2,200 crore fresh capital to grow at 40%: ICRA

The report does not include Bandhan, an erstwhile micro-lender which converted itself into a universal bank last year, and the eight MFIs which have in-principle approvals from the Reserve Bank to become small finance banks.

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The microfinance sector requires fresh equity capital to the tune of Rs 900-2,200 crore over the next three years to grow at 30-40%, a report said on Thursday.

During the first half of 2015-16, the micro-lending sector registered an expansion of 28% compared to a growth of 31% in the same period previous fiscal. "The volume of external capital required to support MFIs (micro-finance institutions) for a compounded annual growth rate (CAGR) of 30-40% over the next three years would be Rs 900-2,200 crore," said the report by rating agency Icra.

The report does not include Bandhan, an erstwhile micro-lender which converted itself into a universal bank last year, and the eight MFIs which have in-principle approvals from the Reserve Bank to become small finance banks.

The sector has seen an increase of 231% in overall equity infusion, from around Rs 530 crore in FY14 to Rs 1,740 crore in FY15. The report further said the in-principle small finance banks licensees would require Rs 2,800-3,000 crore of domestic capital in the event of stake sale from foreign shareholders to Indian entities.

"This could increase significantly to Rs 5,800-6,000 crore in case fresh equity is raised to reduce foreign shareholding...access to capital would hold the key to growth for the MFI industry over the medium term," Icra Senior Vice- President and Group Head for financial sector ratings Vibha Batra told reporters in a conference call.

On the debt side, she noted that the industry has been able to diversify its funding profile with a large number of MFIs raising funds from the debt market and the credit flow from banks improving as well. According to the report, the sector would need a debt fund requirement of Rs 18,000-20,000 crore to support 30-35% growth for next one year.

The systemic softening of interest rates and shift in borrowings towards debt instruments has resulted in moderation of around 100-150 basis points in funding costs for MFIs. One basis point is one hundredth of 1%. 

"Securitisation continues to be a good source for fund raising owing to PSL status for these loans," Batra said.

She said the market size of MFIs was Rs 1 trillion (Rs 1.1 trillion including Bandhan Bank) as of September 2015 but has a potential to grow nearly three-fold to Rs 2.8-3.4 trillion.

"Given that MFIs have the scope to lend another 15% of their portfolio towards non-qualifying (i.e. non- microfinance) loans, they could grow their micro-enterprise loans/micro-housing loans by an additional Rs 40,000-50,000 crore," she said.

The agency said adequate MIS systems, recruitment, employee-training-and-retention are likely to remain critical performance-determining factors, given that staff attrition rate in the industry remains high at around 25% as most MFIs are in a significant expansion drive.

The asset quality indicators of the MFIs (0 days past due) of 0.41% as on March 31, 2015, as against 0.67% as of March 2014, continue to be superior to the SHG bank linkage programme. MFIs also reported 30 days past due of 0.39% as of September 2015.

"The good credit quality has been supported by several safeguards put in place by the regulators such as data sharing through credit bureaus, restrictions on overall leveraging of Rs 1,00,000 per borrower (MFIN directive caps the same at Rs 60,000), and stipulation that not more than two MFIs can lend to the same borrower," Batra said.

She said the proposed Mudra Bank is also expected to bring about uniformity in regulations for all MFI entities.

"Refinancing for MFIs at lower than market rates could lead to reduction in the borrowing cost by around 60-100 bps depending on the share of funding from Mudra Bank in the overall funding mix of an MFI," Batra concluded. 

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