New Delhi [India], April 10 : India's microfinance sector, which went through a tough phase in recent quarters, is now showing early signs of recovery, according to a report by Investec Equities.
The report stated that many companies working in this space are reporting better performance, and asset quality (AQ) is starting to improve. This suggests that the worst might be behind for the sector.
It said, "The current cycle of Indian microfinance appears to be approaching its conclusion, with AQ indicators showing improvement across various MFIs".
The report mentioned that, unlike earlier difficult periods, this slowdown was not caused by any major external event like a natural disaster or government regulation. Instead, it happened due to problems within the sector itself.
These included poor asset quality and a tough operating environment for many microfinance institutions (MFIs). As a result, several players struggled to maintain business performance and now need capital support to continue operations.
The report said, "We expect the recovery to be gradual, leading to consolidation within the sector. Many players continue to face challenges, including poor AQ, and will require capital to stay afloat. MFI NBFCs and SFBs highlighted positive business momentum in 4Q."
Despite the challenges, the situation is slowly getting better. The recovery may not be very fast, but signs of improvement are clear. The sector is likely to see more consolidation, meaning that weaker players may either shut down or merge with stronger ones.
In the last two quarters, both disbursements (new loans given) and the overall loan book (Assets Under Management or AUM) had been falling.
However, the fourth quarter (4Q) brought some good news. Most microfinance companies, including Non-Banking Financial Companies (NBFCs) and Small Finance Banks (SFBs), reported that loan growth had picked up in 4Q. This shows that business activity is improving once again.
In short, while some players are still facing pressure due to bad loans and capital needs, the overall picture is getting better. If the current trend continues, the microfinance sector in India may slowly return to a more stable and healthy state.
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