Microfinance begins to recover, but it’s a long walk to full health

After two years of credit stress, policy reforms and write-offs, India’s microfinance sector is taking tentative steps to recovery.

- Subhana Shaikh [e-mail]

Bad loan ratios moderated and loan collections improved in the September quarter due to the return of borrower discipline, bankers said. However, profitability remains under pressure and growth still appears far. A key reason: Uneven recovery across states and lenders.

Bandhan Bank, which has a large microfinance book, said it is seeing steady improvement in this microfinance portfolio, particularly across its key eastern markets. Its 30-day-plus delinquency ratio now stands at 3.8%, well below the industry average of 5.1%, while 90-day-plus delinquencies have improved to 2.04% compared to 3% for the sector.

Still, Bandhan remains cautious in expanding microfinance, as it strives to reduce concentration risk and make more secured loans.

“Even if we grow in microfinance, our growth in non-microfinance will be at a much higher rate,” managing director and chief executive officer Partha Pratim Sengupta said, adding the share of secured loans in the overall mix is expected to rise further over the next six to seven quarters.

Currently, the secured loan book makes up about 55% of Bandhan’s total advances, and the bank expects this to increase to 57-58% over the next year and a half.