Consolidation of microfinance – Newspaper Kommersant No. 54 (7499) dated 30.03.2023

Against the background of a significant tightening of regulation of the microfinance market, the process of its consolidation is accelerating. Major companies confirm their interest in mergers and acquisitions. But the emergence of an undisputed leader, such as in the banking segment, market participants do not expect.

Elman Mekhtiyev, Chairman of the Council of SRO MiR, speaking at the MFO Russia Forum 2023, said that “against the background of a significant tightening of regulation of the microfinance market”, the process of its consolidation around the largest players who have sufficient capital and technological infrastructure will accelerate. Companies regularly receive requests to find a buyer or to find an asset to buy, Mr. Mehdiyev explained.

From January 1, 2023, the Bank of Russia introduced macroprudential limits for microfinance companies. The share of loans issued to clients with increased leverage in the first quarter of 2023 should not exceed 35%. In addition, from July 1, the maximum rate on loans will be reduced from 1% to 0.8% per day. The restrictions will also affect the allowable amount of overpayments on loans, taking into account interest, fines and penalties – from 1.5x last year to 1.3x in 2023 (see “Kommersant” dated December 29, 2022, dated January 23, 2023).

The new regulatory policy primarily cuts off repeat clients of MFOs, which, despite the high debt load, have shown payment discipline, market participants emphasize. However, companies cannot lend to them without violating established macroprudential limits. “The growth potential of the microfinance market in 2023–2024 is significantly limited on both the demand and supply sides. As a result, annual growth rates will decrease from 30-35% to 10-15% with the intensification of competition,” Ivan Uklein, director of banking ratings at Expert RA, believes.

The struggle for a client is getting tougher and the cost of attracting a quality client flow is growing. “It is difficult for small players to compete with large lenders for high-quality borrowers – this is a big cost, and receiving traffic on a residual basis sharply reduces margins and increases financial losses,” says Roman Makarov, CEO of IFC Zaimer. In such conditions, it is more profitable to sell a business than to fight for existence, he believes. “MFIs that are not ready to change and adopt technologies will be forced to look for ways to exit the market. Others who have invested in technology in 2020-2022 will look for new application areas for development and are ready for classic M&A,” Mr. Mehdiyev emphasizes. Already in 2022, “several acquisitions by large companies of small and medium-sized players took place,” Mr. Uklein notes.

Large companies confirm their interest in M&A transactions, noting that either technology or high-quality portfolios are of value. For example, a large proportion of regular customers, says Alexei Imkhovik, CEO of Summit Group. In addition, the company is considering buying MFIs with unique technologies. It may be interesting to buy a client base, notes Andrey Kleimenov, CEO of Eqvanta Group.

The regulator may also be interested in market consolidation, market participants are sure. “Several hundred companies are easier to check and control than the base of more than a thousand players that are now on the registry (1110 companies as of March 29, 2023.— “b”). This can give the market more purity and transparency in terms of control,” believes Mr. Kleimenov. In the face of declining business profitability, not all players will be able to continue their activities, 300-350 companies may leave the sector this year alone, estimates Sergey Vesovshchuk, CEO of Moneyman. However, it is not worth expecting the emergence of a major player on the market in the next three to five years, which will occupy, for example, 40%, Mr. Kleymenov believes.

Polina Trifonova