Crisil says, loan portfolios of microfinance companies to grow at a compounded annual rate of 35%, to touch Rs450 billion by March 2016

The Indian microfinance industry is all set to put the Andhra Pradesh crisis behind and rebound showing more resilience, said the rating agency CRISIL at a press conference today.

According to CRISIL, the sector will grow at a compounded annual rate of 35% , to reach Rs450 billion by end-March 2016 “supported by stronger building blocks”.

In order to to sustain the current pace of growth, micro finance instituitons (MFIs) will have to raise equity; but that will require them to “address challenges associated with low promoter shareholdings and a near-term decline in profitability”, said CRISIL.

CRISIL attributes the change in fortunes of MFIs to “greater clarity from the Reserve Bank of India’s guidelines, deeper penetration of credit bureaus, and increasing use of technology to improve collections, which are distinctive features of the current phase of growth in India’s MFI sector”.

According to a CRISIL release, “Improved geographical spread of assets has also raised stakeholder confidence and improved funding availability. No state now accounts for more than 20% of loans from the MFIs, down from 35% at the time of the crisis. Over the past three years, MFIs have raised Rs20 billion as equity, and Rs240 billion as additional funds from banks. Notably, bank funding to MFIs is eligible for priority sector lending status. However, the MFIs’ dependence on bank loans, specifically from the top five banks, is expected to remain high over the medium term”.

It further says, “MFIs are adequately capitalised for their current scale of operations. However, three years of rapid growth have skewed the sector’s gearing to 5.4 times, from around 3 times in the past. A CRISIL analysis indicates that the MFIs need to raise equity of at least Rs18 billion over the next two years to maintain growth momentum and gearing at current levels.”

Sustaining growth would depend on two factors. First, promoter shareholding, which has declined significantly following repeated infusions of capital, which has to be shored up. Promoter stakes are as low as 20% for the ten leading MFIs, says CRISIL. This could constrain fund raising. Secondly, CRISIL says, MFIs have to deal with a potential reduction in investor appetite because profitability of the large players is set to decline by around 30 basis points annually over the next two years. With interest margin capped at 10% from April 2014, interest spreads could fall by up to 120 basis points.

The rating agency expects MFIs to offset this partially by increasing their fee incomes, especially from banking correspondent activities, and by cranking up scale of operations and operating efficiencies.