Microfinance Revival in Sight in India, Banks to Take the Lead: HSBC Report
Indian microfinance is seeing signs of a revival after months of pressure from overleveraging by borrowers, a report by HSBC Research published on Wednesday said.
The report highlights improving loan collections and higher disbursements in February, boosting confidence in the sector. Collection efficiency in the 'X bucket' category accounts with no overdue payments from the previous month improved to 98.5-99.5% in most states. This improvement has also helped reduce employee attrition rates, which had been a concern over the past year.
Still, the industry remains challenged, most notably in Karnataka, where a government ordinance interrupted microfinance institution (MFI) activities in February. The state bill proposes exempting borrowers from repayment of loans borrowed from unlicensed and unregistered MFIs, a critical threat to lending institutions. In reaction, MFIs have taken steps to stabilize business and reduce the effect.
In the future, HSBC Research forecasts credit expenses for MFIs to fall in the April-June quarter as asset quality improves. But new regulations that come into force from April 1, capping lending to borrowers, are expected to drive credit expenses up again.
In spite of these challenges, microfinance-exposed banks are well placed to grow in the long term. According to HSBC Research, banks, thanks to their diversified portfolios and enhanced earnings resilience, are better placed than standalone MFIs. Their better asset quality and favorable valuations have the potential to offer investors superior returns.
"With a diversified portfolio and strong earnings resilience, banks should beat standalone MFIs in the long term", the report added.
The microfinance industry, an important part of India's push for financial inclusion, seems to be going back on track. While there are still regulatory issues, banks are likely to spearhead the industry's comeback, reaffirming their leadership in spurring financial stability and growth.
