CreditAccess Grameen's Rise Marks A Shift In India's Microfinance Growth Story
Along with faster disbursals, CA Grameen also acquired another microfinance company to boost its loan book
Upset by successive waves of the pandemic and required to adjust to regulatory changes, India’s microfinance lenders grew at a slow clip over FY21 and FY22.
But the current financial year has seen a ricochet in growth with total micro-loans disbursed jumping by almost 20% year-on-year in the third quarter.
The loan portfolio of NBFC-MFIs—non-bank microfinance lenders—increased by 41.1% in the third quarter to Rs 1.23 lakh crore while banks grew their micro-loan portfolio much slower at 10.6% year-on-year to Rs 1.14 lakh crore, according to a report from the MicroFinance Institutions Network.
India’s largest non-bank microfinancier, CreditAccess Grameen Ltd., sits on a sizeable chunk of this market and seems poised to benefit from the rebound. Earlier in March, the lender announced that it had crossed an assets under management size of Rs 20,000 crore. While industry data for the current quarter is yet to be released, the overall size of outstanding loans made by NBFC-MFIs stood at Rs 1.2 lakh crore.
The rise in AUM was also supported by an acquisition. CreditAccess Grameen also completed its merger with Madura Micro Finance Ltd. on February 15. CreditAccess Grameen had announced its agreement to acquire Madura Micro Finance in November 2019. The acquired entity had an AUM of Rs 3,026 crore as of March 2022.
“The second half of last year is when growth started, and it’s continuing,” Udaya Kumar Hebbar, managing director and chief executive officer at CA Grameen, told BQ Prime, referring to the uptick in credit demand CA Grameen has witnessed. The company is confident of achieving its FY23 performance guidance of 24-25% AUM growth, Hebbar added.
The lender has maintained new-to-credit ratio of around 30-35% among its borrowers over the past few quarters, Hebbar told BQ Prime. CreditAccess Grameen reported standalone net profits worth Rs 197 crore in the third quarter of FY23, denoting a year-on-year growth of about 53%.
The micro-lender has also benefited from being able to implement risk-based pricing, allowing for an upward revision of 125 basis points in its lending rate over the last 9 months, according to a February note from analysts at ICICI Securities.
In March 2022, Reserve Bank of India put an end to pricing caps for microfinance lenders and also approved a standard definition for what constitutes a microfinance loan.
The end of pricing caps levelled the playing field between banks and non-bank micro-lenders and allowed the latter to also adopt a risk-based pricing strategy. Before the change, RBI guidelines required micro-lenders to adhere to a margin cap of 10% if they have an asset size of Rs 100 crore or above.
RBI's updated rules now define a micro-loan as collateral-free loan extended by a lender to a borrower with an annual household income worth up to Rs 3 lakh.
But due to its sizeable reliance on long-term debt for incremental capital, CA Grameen's incremental cost of funds also jumped by over 100 basis points sequentially in the October-December quarter, ICICI Securities said in a note on February 8.
Going forward, Grameen will focus on raising funds via domestic retail markets through public NCDs and foreign markets through international bonds, Hebbar said.
The company does fare better than its peers when it comes to cost of funds. CreditAccess Grameen's weighted average cost of borrowing stood at 9.6% in the third quarter of FY23. In comparison, Spandana Spoorthy Ltd. stood at 11.5%, while Fusion Microfinance Ltd. was at 10.26% in the same period.
Expansion Territory
CA Grameen "has given consistent record of weathering the various cycles—whether it is demonetisation, or disturbances in Maharashtra, or even Covid—it has come back strong," Alok Misra, chief executive officer at MFIN, told BQ Prime, referring to CA Grameen's recent performance. "It also teaches you how you can grow big and still be responsible and very ethical in your workings," he said.
The lender's diversified liability profile, product offerings, and differentiated operating model, will continue to be guiding principles for the future as Grameen aims to maintain consistent portfolio growth, Hebbar said.
CA Grameen expects its NIMs to hover around 12% going forward with the revised pricing in place, Hebbar said. While CA Grameen also offers other types of loans beyond income-generation micro loans, their share in the overall loan pie has remained relatively small.
Beyond its loan offerings, CreditAccess also has plans to enter the insurance business at the group level.
"Majorly, current mainstream insurance companies may not have the focused and suitability approach towards rural, low-income household customers,” Hebbar said.
With the micro-loans segment poised to grow faster as a whole, CA Grameen might just be adequately positioned to strengthen its pole position among non-bank micro lenders.
"My sense is that in FY23 we will see around 30-35% AUM growth for the MFIs and roughly that 30% growth should continue into next fiscal, FY24," Krishnan Sitaraman, deputy chief ratings officer at CRISIL Ratings, told BQ Prime. Sitharaman clarified that his views are not company specific.
Going forward, the trajectory of cost of funds for micro-lenders and their ability to raise equity capital will remain key monitorables, he added.
"In the last couple of years, many MFIs have been able to mobilise equity capital. They will need to continue to do that if they have to support a relatively higher growth," Sitharaman said.