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

After a four-year interval, standalone Microfinance Institutions (MFIs) have reclaimed their dominant position 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.

Recovery and Resurgence:

• The pandemic had severely impacted MFIs, causing a significant drop in collections and disbursals.
• 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 witnessed a robust 37% growth in FY23, driven by a favorable macroeconomic climate and renewed demand.
• This growth translated into higher disbursements and expansion of the microfinancing landscape.

Empowering Risk-Based Pricing:

• The Reserve Bank of India’s removal of lending rate caps empowered MFIs to adopt 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 challenges, NIMs are expected to continue their upward trajectory, reaching 3.8% in FY24, supported by controlled credit costs of about 2.5%.

Investor Confidence and Capital Inflow:

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

Regional Dynamics:

• States such as Bihar, Tamil Nadu, Uttar Pradesh, Karnataka, and West Bengal continue to lead in terms of MFIs’ 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, empowered by risk-based pricing and improved credit quality, suggests continued expansion and innovation within the microfinance sector.

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