“The idea is to underwrite microfinance loans at an individual level rather than rely on JLG structures,” said a senior Kotak Mahindra Bank executive, who did not wish to be identified. “Every five to six years, we have seen stress emerge in microfinance. Given the availability of granular data today, we believe individual underwriting will hold us in good stead.”
The bank plans to gradually rebuild its microfinance book, which nearly halved to ₹5,725 crore at the end of September from ₹9,776 crore a year earlier. “In a few years, we expect the microfinance book to revert to its earlier levels of about ₹12,000 crore,” the executive said.
The bank’s management remains cautious given the cyclical nature of the microfinance business and plans to expand the portfolio slowly and selectively to manage risks prudently.
During the September quarter, the bank had noted that industry-wide microfinance advances were contracting, but it expects the trend to reverse, with a gradual recovery beginning from the third quarter of this financial year.
The contraction in the bank’s retail microcredit portfolio was primarily due to repayments outpacing disbursements, although disbursement volume increased quarter-on-quarter in the three months to September.
Kotak Mahindra Bank also said that early indicators of portfolio quality for loans originated through its risk profile-based underwriting model are encouraging. Targeted recovery efforts have led to improvements in collection efficiency across all delinquency buckets. According to the management, stress in the microfinance portfolio peaked in the first quarter of this fiscal and performance is expected to improve gradually in the coming quarters.
Additionally, following the merger of its microfinance entities BSS and Sonata, the bank expects the integration to help build a unified national franchise, enhancing reach, operational scale and the ability to serve customers more efficiently across geographies.
In an interview to ET on May 5, Kotak Mahindra Bank managing director and CEO Ashok Vaswani had expressed his concern over the microfinance segment.
“A business that is this cyclical shouldn’t grow to a size where it keeps you up at night,” he had said. “We know this sector tends to blow up every three-five years. We need to find a way to temper that volatility.”
Vaswani had also questioned the JLG model and said that it could no longer be relied on for expanding the microfinance book.