Microfinance in India: A Promising Frontier for Economic Inclusion
Published by Sharekhan Education | May 26, 2023
By Amit | Pathak
Microfinance, a legitimate financial service that provides small loans to impoverished and low-income households. Which is gaining momentum as an effective tool for promoting financial inclusion. With its short-term tenure and absence of collateral requirements, microfinance empowers individuals to generate income and improve their livelihoods. In this article, we explore the vast untapped potential of microfinance in India and discuss the positive impact of recent regulatory changes. Additionally, we’ll highlight the growth prospects of Credit Access Grameen (CAG), a leading player in the industry.
Untapped Growth Potential in India:
Microfinance in India holds significant untapped growth opportunities. Particularly in states like Madhya Pradesh, Odisha, and Bihar, where a large population still lacks access to financial services. The total eligible household population in the country amounts to approximately 166 million, representing an untapped opportunity of around Rs. 6.6 lakh crore. Notably, the average loan ticket size in the industry has risen from Rs. 23,000 in FY18 to Rs. 39,000 in FY22. According to CRISIL, this figure is expected to further increase to Rs. 45,000 by FY25E, bolstering the loan growth of microfinance institutions (MFIs). Despite setbacks caused by the Covid-19 pandemic, the industry is set for robust growth in the coming years as asset quality stabilizes and loan book expansion resumes.
Favorable Regulatory Changes:
Recent regulatory changes have expanded opportunities within the microfinance sector, enhancing its potential for growth. The increase in the household income limit to Rs. 3 lakhs allow MFI players to cater to customers with higher ticket sizes, who were previously being lost to banks. Furthermore, the removal of the 10% cap on spreads empowers lenders to offer differential pricing based on customer risk profiles, driving margin expansion. The increase in exposure limit from 15% to 25% for non-MFI loans enables lenders to venture into secured businesses and strengthen customer retention.
Exploring Credit Access Grameen (CAG):
Among the notable players in the microfinance sector, Credit Access Grameen (CAG) stands out as a Bengaluru-based MFI backed by Credit Access India BV (CAI). CAG operates across 14 states, boasting 1,727 branches and a dedicated workforce of 16,807 employees. Its significant presence in Karnataka, Tamil Nadu, and Maharashtra contributes to its overall market strength. With a robust risk management framework, conservative credit underwriting practices, and comprehensive customer assessment, CAG has successfully controlled delinquencies. According to a report by ICICI Securities, CAG’s assets under management (AUM) are projected to grow. At a compound annual growth rate (CAGR) of 20-25% over FY23-25E. The decline in credit costs is expected to drive earnings growth at a CAGR of 52% over FY22-25E. Leading to improved Return on Assets (ROA) of approximately 4% and Return on Equity (RoE) of
around 20%.
Investment Opportunities:
In conclusion, the microfinance sector in India holds tremendous potential for growth, driven by the increasing loan ticket sizes, regulatory changes, and the commitment of key players like Credit Access Grameen. By embracing this transformative financial tool, we can collectively foster financial inclusion and empower individuals to build a brighter future.
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