Navigating turbulent waters – Business

Pakistani microfinance banking sector has not fared well lately. It’s been five years since the industry’s fortunes began to change on the back of heavy net losses and a spike in bad debts — some big enough to wipe off all of the equity in certain cases.

Until almost a year ago, the Pakistan Microfinance Network stopped releasing data. Only two weeks ago, the body finally published Microwatch for the latter three quarters of 2023, giving us a peek into what happened.

On the surface, the picture looks fine, as the gross loan portfolio of both banks and institutions reached Rs546 billion by December 2023. This represented an increase of 11.2 per cent compared to the same period last year and 3.1pc over the preceding quarter.

Similarly, the number of active borrowers reached a fresh peak of 9.4 million, thanks to continuous growth in individual lending. This is part of the industry’s broader shift towards nano finance led by telco-backed players like JazzCash and Easypaisa that began in 2021. Nothing signifies this embrace better than the average loan size falling further to just Rs14,493 in Q4FY23. Between 2016 and 2020, the corresponding amount stood at Rs46,000 across the three categories — the other two being group and enterprise.

Microfinance banks’ return on equity reached -56pc by March due to consistent capital losses over the past five years

However, the devil is in the details, which aren’t available in Microwatch. The actual red flags pertaining to the sector’s health can be seen in the State Bank of Pakistan’s (SBP) compendium and scheduled banking statistics.

According to the former, microfinance banks (MFBs) incurred a loss after tax of Rs8.1bn in 2023, making it the fifth straight year of negative net income. During the last 20 quarters, there has been only one period when MFBs didn’t post a loss, and that too was a solitary profit of Rs101m.

This is despite the fact that Telenor Microfinance Bank’s bottom line finally turned black in 2023 with a profit after tax of Rs502m. In the preceding five years, it had played a major role in dragging down the sector’s bottom line and incurred a cumulative loss of Rs47.4bn. But apparently, others have happily picked up the tab instead.

All these losses have begun to weigh heavily on the microfinance banks’ capitalisation levels, which have been deteriorating consistently. The SBP requires MFBs to maintain a minimum capital adequacy ratio (CAR), ie total capital divided by risk-weighted assets, to be at least 15pc. But, long gone are those days; the last time the sector met this criteria was in Q2FY22.

Since then, the CAR of MFBs has been in freefall, reaching 7.6pc at the end of 2023 and almost half of the required level. If that wasn’t enough, the ratio further slipped to 6pc by Q1FY24. Unfortunately, not all banks have yet published their annual financials to keep an exact number of how many players are troubled, but it is nevertheless quite high.

For example, HBL Microfinance, which boasts the largest gross loan portfolio (GLP), has received capital injections worth Rs10bn from sponsors in the last couple of years, including Rs6bn announced just a few weeks ago.

Similarly, U Microfinance Bank saw its CAR slip below the minimum 15pc to 13.9pc by 2023 and then further to 9.4pc in March. However, compared to the NRSP Microfinance Bank’s negative 6pc ratio, these figures look incredible. Khushhali Microfinance Bank is hardly any better with a CAR of 5.7pc. These are four of the five biggest entities and cumulatively make up 51.8pc of the gross loan portfolio, highlighting that the rot runs to the very top.

The capitalisation situation in the sector has alarm bells ringing, with both the World Bank and the International Monetary Fund raising the issue in their recent reports. For now, most of the sponsors have stepped up in times of stress, be it Telenor and Ant or Ufone. But will they be willing to continuously inject capital or convert debt instruments into equity forever? After all, MFB prospects don’t seem too promising, with a return on equity of an unbelievable -56pc as of March. Keep in mind that this is no nascent sector still on a growth trajectory and finding its feet.

Published in Dawn, The Business and Finance Weekly, June 3rd, 2024