Microlenders wake up to hangover after credit party

Leading microfinance companies including CreditAccess Grameen, Fusion Finance and Equitas Small Finance Bank have warned that many of their customers may be over-leveraged, after discovering that some have four or more active loans.

Industry officials and analysts identified three reasons for the state of things; One, a post-covid credit binge that drew in many borrowers; two, employees chasing disbursement targets pushing loans to those who are already indebted; and three, delayed updates of data from credit bureaus that lenders rely on to check applicants’ existing liabilities.

At India’s largest non-bank micro lender CreditAccess Grameen, 26.3% borrowers are unique to it. Then, 19.9% of the borrowers have loans from CA Grameen and two more lenders; and 15.3% have four or more borrowers apart from CA Grameen, as of August. This was the first time the lender shared data on such overlap.

Udaya Kumar Hebbar, managing director of CA Grameen said it has observed a temporary increase in delinquencies across various geographies. “A segment of over-leveraged borrowers with lower cash flow also are part of this delinquent bucket,” Hebbar told analysts on 25 October.

Also read | Largest micro-lender CreditAccess Grameen joins peers in flagging stress pockets

Segments with higher overlap—where a single individual has borrowed from many lenders—saw higher delinquencies. The last bucket of borrowers—or those with loans from CA Grameen and four or more lenders—saw the highest stress with the percentage of loans overdue for more than 15 days at 12.2% in September.

At rival micro lender Fusion Finance, 33.3% of the customers are unique to it as of 30 September, an increase from 30.9% as on 31 March. Moreover, 10.5% of its customers had loans from four other lenders as on 31 March, which declined to 5.7% in September.

The lender told analysts on 16 November that customers’ credit profiles have weakened because of this over-leverage, and believes that once the leverage declines, it will be easier for them to repay.

Alarmed by how borrowers were taking loans from multiple lenders, industry associations decided to put in place certain guardrails about four months ago.

P.N. Vasudevan, chief executive of Equitas Small Finance Bank told investors on 8 November that the situation continues to be a concern.

At the end of June, 2.5 million microfinance borrowers had loans from five or more lenders, up 17.2% from the same period last year, showed data from credit bureau Crif High Mark. The data comes with a lag and the September quarter data would be available later.

CA Grameen’s gross non-performing asset ratio was at 2.44% as on 30 September, as against1.46% in the June quarter. Similarly, at Muthoot Microfin, gross bad loans ratio stood at 2.7% in September, up from 2.1% in the June quarter.

Also read | Private equity firms at Svatantra Microfin’s doorstep

Meanwhile, self-regulatory organisation Microfinance Industry Network (MFIN) on Monday said it has decided to tighten lending norms, by reducing the number of microfinance lenders to a borrower to three from four earlier, and lenders’ boards taking a closer review of interest rates.

Alarmed by how borrowers were taking loans from multiple lenders, industry associations decided to put in place certain guardrails about four months ago.

“In July, when we realized that stress is developing, we had a meeting of chief executives of microfinance institutions in Bengaluru, and put in place some additional guardrails over and above the code of conduct,” said Jiji Mammen, executive director and chief executive of Sa-Dhan, an industry body of micro lenders.

While Sa-Dhan did not cap the number of lenders a single individual can borrow from, it said the outstanding exposure of a household from all sources should not exceed ₹200,000.

According to Mammen, after the pandemic ended and a new regulatory framework for microfinance was introduced, MFIs rushed to attract more business, and some of their processes might have got diluted. He was referring to RBI’s decision in March 2022 to remove pricing caps on microfinance loans, bringing them at par with those like banks.

According to Mammen, bureau data that MFIs depend on does not get updated regularly by all participating institutions, and at times, when MFIs try to give a loan, it does not get to know if there are other liabilities.

“Right now, MFIs are not allowed to use Aadhaar as identity proof because of government restrictions and have to rely on other documents like voter ID cards. Usage of Aadhaar would make it easier to identify individuals and avoid fraudulent persons,” said Mammen.

Analysts from Emkay Global Financial Services who met officials from some micro lenders in Kolkata said over-borrowing was the key reason for higher MFI stress.

Also read | Microfinance lenders go for secured loans to diversify risk

In a note to clients on 19 November, Emkay said that other contributors include a structural deterioration of the joint liability group model, rising indiscipline among lenders and borrowers, employee attrition, climate vagaries, and lingering effects of loan waiver campaigns in some states.

They added that the recent business suspension of entities like Arohan by the RBI and the resultant cascading effect of curbing limits or multiple lenders could keep the stress flow elevated in the near term.