Demonetisation hits small loans as sectoral growth more than halves

India's micro loans sector grew at 29% in FY2017 as against 72% in the year previous to last, ICRA said on Monday. Fresh disbursements slowed down substantially in H2FY2017, consequently, leading to their overall portfolio growth shrinking considerably, it said. 

MFIs and SFBs raised an aggregate of Rs. 4,713 crore of equity capital in FY2017, of which Rs 1,155 crore was raised after demonetisation, indicating continued support from equity investors. 

ICRA said, "The Indian micro loan sector with a size of around Rs 1.7 lakh crore as on March 31, 2017, has grown at a healthy compounded annual growth rate of 32% during FY2013-2016. Of this NBFC-MFIs, Small Finance Banks (SFBs) and Banks (excluding the SHG Bank linkage programme) had grown at a much faster pace of 57%. However, the growth trajectory for NBFC-MFIs/SFBs and banks changed post-demonetisation  with the portfolio growth slowing down from 72% in FY2016 to 29% in FY2017."

Rohit Inamdar, Group Head Financial  Sector Ratings, ICRA said, “Overall collection efficiencies for the industry as a whole came down from around 99% before demonetisation to 82% in December 2016, and improved to around 85-88% till March 2017."

"Consequently, the 0 days past due delinquencies that had peaked to 23.6% in February 2017 improved to 19% in June 2017.  However, further flows from softer buckets led to deterioration in 90 days past due delinquencies from 4.9% as on February 28, 2017 to 11% as on June 30, 2017," he said. 

“Based on the present recovery trends from delinquent buckets, 70-75% of the portfolio delinquent more than 90 days is likely to be written off, therefore mean credit costs for the industry as a whole are likely to be in the range of 5.5-8% for FY2018," Inamdar said. 

"Given their higher expected credit costs for FY2018, ICRA estimates that MFIs and SFBs together would need external capital of Rs 9,000-11,000 crore for growing at a CAGR of 25-30% over the next three years, while maintaining a leverage at around 5 times. Therefore, present leveraging levels, expected credit losses and ability to raise capital will be a critical distinguishing factors for MFIs in the near to medium term,”  he said.