According to the Central Bank of the Russian Federation, in 2022 the share of bank funding in MFIs decreased from 45% to 29%. First of all, the trend is associated with the fact that MFIs were able to increase capital and reduce dependence on borrowed financing from the profits earned. How will cooperation between the two sectors of the financial market proceed?
Prerequisites for a trend reversal: why banks are an important source of funding for MFIs in 2023
In 2023, the dynamics of attracting bank funding to MFIs will depend on how quickly companies can adapt to regulatory innovations and return to the pace of business growth that require an expansion of the liquidity reserve. With the entry into force of macroprudential limits some players have become more conservative assessing the risks taken. Accordingly, there are no prerequisites for occurrence of urgent need for additional liquidity.
Nevertheless, we expect that in 2023 the share of bank funding will gradually recover. First, because bonds remain today an expensive source of funding and are available to authorized organizations only. Since the cost of bank loans depends on key rate, and it is now at low level in current circumstances, then this funding tool remains the most profitable for companies, and MFIs will expand their limits in banks.
What conditions of cooperation are of interest to banks in 2023
When considering an application for opening a credit line, banks carry out a serious analysis of the creditworthiness of MFIs. It’s quite a long time procedure that requires a lot of work by credit department specialists, therefore, the provision of borrowed funds in the amount of 1-2 million rubles for banks is not practical. Today banks are interested in opening credit lines with limit from 100 million rubles with monthly volume of loans issued from 300 million rubles. However, just the top 20 companies in the industry meet such criteria.
The market value of bank funding is now defined as key rate plus 6-7 % and depends on limits, covenants, and creditworthiness of the borrower. Increase in the cost of bank loans is unlikely perhaps because the situation in the economy remains unfavorable and it is not so easy to find paying customers in the corporate segment.
On the other hand, not many banks (just about five) are currently working with MFIs. If the competition was higher, then the proposals would be more diverse and more flexible for small MCBs. At the same time, a purchase precedent has already occurred on the market: a large MFI has acquired the bank, which is now ready to lend to the sector, as the team has the necessary expertise in assessing the creditworthiness of borrowers.
Securing credit for MFIs is a liquid alternative to firm pledge
Today, most banks are ready to consider exclusively solid property as collateral for a loan in the corporate segment – i.e. real estate, machinery, and vehicles.
However, in the case of lending to MFIs, another liquid property may act as collateral – a portfolio of microloans that is always possible to realize through a collection agency and other MFIs. A bank just has to make a good discount and fair assessment neutralizing all risks, so that in the event of a customer default, he is guaranteed to realize this portfolio without loss.
And if the turnover at the bank’s payment gateway is set in covenants, then the creditor practically does not risk anything at all, since he has the opportunity to write off all receipts without acceptance.
How regulatory changes will impact the business and creditworthiness of MFIs
According to a number of experts, regulatory changes in the market in 2023 may affect positively the quality of MFI portfolios. And if it grows, then it is possible to predict positive dynamics for all operational business indicators. The higher the indicator of profitability for each generation of issuance from MFIs, the more liquidity it has compared to an average market company.
The attractiveness of the borrower for the bank is primarily his financial condition, which is reflected in profitability indicators, by capital/debt ratio, the ratio of net income to interest. So the bank can predict whether MFIs will meet their obligations of the credit line maintenance and on its repayment, even if the profitability of the business decreases.
Thus, indirectly, regulatory changes can actually improve operational performance of the business, which reduces significantly the risks of non-fulfillment of liabilities towards creditors.
Why MFIs are interesting borrowers for banks
Speaking about the factors determining banks’ interest in MFIs in 2023, it is important to note that the microfinance sector is close to banking and tolerant to risk and various stress factors, unlike other areas of business. For example, the market of car dealers is facing hard times now, as some auto manufacturers just left the market.
As an example other industries can be cited that were a significant group of borrowers from banks, and now their cooperation has come to naught. At the same time, the MFI industry feels fine under current conditions – despite the fact that growth of microloan portfolio slowed to 11% YoY in 2022, demand for online lending services is not declining. Moreover, the flow of bank customers has a positive impact on the industry.
Finally, as practice has shown, MFIs are not directly affected by sanctions. Despite the continuing turbulence in the financial market in 2022, microfinance business is developing and growing. We can expect that in a number of key industry indicators we will see positive dynamics in 2023.
By Alexander Soloviev, Head of Finance at Cash-U Finance