Microfinance Landscape Shift: Standalone MFIs Take Lead with 40% Microlending Share

Microfinance Landscape Shift: Standalone MFIs Take Lead with 40% Microlending Share: After a four-year hiatus, freestanding Microfinance Institutions (MFIs) have regained their dominance in microlending, surpassing banks. This resurgence is attributed to their recovery from pandemic-induced setbacks and strategic efforts, with standalone MFIs now holding a 40% share of microfinance loans in the country.

Daily Current Affairs Quiz: August 2023

Recovery and Resurgence:

The pandemic had had a significant impact on MFIs, resulting in a significant drop in collections and disbursements. Standalone MFIs have shown remarkable growth, rebounding from a 32% share in FY20 to 40% in FY23. Banks, on the other hand, saw a decline in their microlending share from 44% in FY21 to 34% in FY23.

Macroeconomic Factors and Growth:

The microfinance industry grew by 37% in FY23, thanks to a favourable macroeconomic environment and increasing demand. This growth translated into higher disbursements and expansion of the microfinancing landscape.

Empowering Risk-Based Pricing:

The lifting of lending rate ceilings by the Reserve Bank of India enabled MFIs to implement risk-based pricing strategies. This shift led to improved net interest margins (NIMs) and higher returns on total assets, bolstering MFIs’ financial standing.

Credit Quality and NIM Improvement:

Credit costs have reduced from the peak of FY21 but still remain elevated compared to pre-pandemic levels. Despite obstacles, NIMs are likely to continue rising, reaching 3.8% in FY24, supported by 2.5% regulated credit costs.

Investor Confidence and Capital Inflow:

MFIs raised almost Rs 3,000 crore in equity in FY23, indicating revived investor interest. This capital infusion signals confidence in the sector’s growth prospects and sustainability.

Regional Dynamics:

Bihar, Tamil Nadu, Uttar Pradesh, Karnataka, and West Bengal continue to lead the way in terms of MFI Assets Under Management (AUM). Bihar, with a market share of about 15%, stands out as the top state in the microfinance sector.

Future Outlook:

Care Ratings’ analysis anticipates the growth momentum to persist in the current fiscal year, albeit at a slightly slower pace of 28%. The evolving landscape, fueled by risk-based pricing and improving loan quality, predicts that the microfinance sector will continue to expand and innovate.