The Rise of Micro Credit Institutions
In a surprising turn of events, micro credit institutions (MFI) have surpassed banks in the micro-lending sector and reclaimed the top position. Despite facing numerous challenges due to the COVID-19 lockdowns, the market share of MFSIs in micro loans has reached an impressive 40 percent in 203, up from 35 percent in the previous financial year.
This achievement becomes even more remarkable considering the significant decline in collections and new loan disbursements experienced by the MFI industry. With a 37 percent growth rate, MFSIs have outperformed banks, which registered a growth rate of 24 percent in micro loans during the last financial year.
The COVID-19 pandemic posed unprecedented challenges for the microcredit sector. However, as the MFI industry gradually overcomes these hurdles, it is evident that they have aggressively increased their share in micro loans. By March this year, their market share reached an all-time high of 40 percent, while banks’ share decreased to 34 percent.
CARE Ratings, a reliable source of financial insights, forecasts that the microcredit industry’s growth will continue, albeit at a more moderate pace. It is expected to be limited to 28 percent in the current financial year. The risks associated with this growth include an increase in average loan ticket size and lending to individual borrowers instead of joint loans. Political and geographical uncertainties also pose potential challenges.
Despite the challenges, there are positive developments in the microcredit industry. The Reserve Bank of India lifting restrictions on lending rates allows MFSIs to determine risk-based rates, which enables them to increase their net interest margins (NIM). Additionally, borrowing costs, although still high compared to the pre-pandemic period, have decreased from their peak in 2020-21.
NIM predicts a further improvement to 3.8 percent in 2023-24, indicating a positive trend for MFSIs. It is important to note that some of the previously classified loans as non-performing assets have been revived, reflecting the resilience and adaptability of microcredit institutions.