The microfinance sector has three key challenges heading into 2024 as lenders look to maintain the current growth trajectory.

High attrition rates in frontline staff, low group attendance and erratic weather elevating risks of delinquency are among the key concerns that the leaders of the industry are expected to take stock of before the year ends.

“We are continuing to see higher attrition rates which is a legacy of the Covid pandemic. Attrition levels among frontline staff have not yet reached a pre-pandemic level.

"The industry, pre-Covid had a 25 per cent (frontline) attrition level," said Manoj Kumar Nambiar, managing director, Arohan Financial Services.

"Right now frontline attrition is almost 40-50 per cent. It was even higher but has slightly tapered off in recent months. But there needs to be a lot of work to get back to what it used to be in pre-Covid period," he said.

“It is a fact that the attrition level of the frontline staff is high and there are a few reasons for it. In the MFI sector itself, there is a lot of growth happening and there is movement of individuals from one MFI to another. There are also other options available for the frontline staff in other sectors which are perhaps less demanding,” said Jiji Mammen, executive director and CEO, Sa-Dhan, a self-regulatory organisation for MFIs.

High attrition also raises the cost for the company as new staff have to be trained on various aspects such as loan origination, collection efficiency and asset quality.

The thrust on assessment of household income has also gained importance following the new regulatory framework of microfinance loans from RBI effective from April 2022.

Another headwind is the low attendance levels at group meetings. Group-level meetings are a popular and effective means for loan disbursal and collection for microfinance lenders. But according to lenders, borrower behaviour has changed following the pandemic.

“There used to be 80-90 per cent attendance in groups pre-Covid. It went down to 50 per cent when we were emerging from the pandemic. While the number has since improved, it is still less than pre-pandemic levels,” said Nambiar.

As a consequence of low group attendance, loan officers often may have to go to the house of the borrower which lenders said is not an optimal model and the outcome could be an uptick in delinquency levels.

“During Covid times, the group meeting concept got disrupted. Lenders would now have to explore ways to make it more interesting for borrowers,” said Mammen.

He also said that with digital means of repayment gaining traction and with a thrust on household income assessment, there is an increasing trend of lenders preferring to manage customers at an individual level.

The third headwind emerges from the increasing risk of erratic weather affecting livelihood, income and ability to repay, particularly in the rural sector, which constitutes over 60 per cent of the gross loan portfolio of the industry.

“Climate change is something which one cannot ignore any longer. We saw what happened in Chennai recently. Odisha is affected by cyclonic activity frequently. In different parts of the country, we are seeing erratic weather and that impacts the customer’s income,” said Nambiar.

The industry however is optimistic of clocking a similar level of growth as FY23. Data from Crif High Mark shows the gross loan portfolio of the industry was Rs 3.37 lakh crore as of March 2023 with a year-on-year growth rate of 17.9 per cent. The portfolio grew to Rs 3.55 lakh crore as of June 2023 with a year-on-year growth rate of 24.3 per cent.

“The second half of the year is generally good for the industry and the fourth quarter is most robust in terms of growth. This year we are expecting similar or slightly higher growth numbers than last year,” said Nambiar.