The microfinance industry is likely to grow at 20-22 per cent in the current financial year and the industry will require external capital of Rs 3,500-4,700 crore over the next three years, the report said.
"While the growth prospects remain good, the industry likely to grow at 20-22 per cent in the current fiscal. There is a need for the MFIs to do a more involved and thorough credit analysis/ assessment of the actual debt repayment capacity of the borrower," according to a report by rating agency Icra.
The industry may need external capital of Rs 3,500-4,700 crore over the next three years, it said.
The report noted that the asset quality indicators of the microfinance sector should be supported by ensuring stringent group selection/elimination norms and adequate credit discipline at the borrower level.
The asset quality improved with the 90 days past due delinquencies (dpd) level declining from a peak of 11.6 per cent in June 2017 to 3.9 per cent in December 2018, supported by write-offs, better recoveries, high portfolio growth and robust collections post the demonetisation.
"The segment, however, remains vulnerable to income shocks, political interference, and event risks. We expect the credit costs for the sector to remain volatile with a mean level of 1.5-2 per cent annualised," it said.
Investors continued to support the MFIs with an equity infusion of around Rs 4,350 crore in FY19 as against Rs 4,100 crore in FY18.
However, more than 90 per cent of the capital raised in FY19 was by the MFIs with AUMs of greater than Rs 1,000 crore.
"This implies that larger entities have been able to attract capital while the smaller less-diversified entities continue to struggle on this front," the rating agency said.