 "Commercial banks have turned cautious in lending to smaller microfinance institutions (MFIs), which has forced the latter to borrow from non-banking financial companies (NBFCs) at much higher rates.")
Illustration: Binay Sinha
Reflecting the build-up of stress due to a rise in delinquencies, the credit costs of microfinance companies are expected to rise to 3.0–3.5 per cent in the current financial year (FY25) from around 2.0 per cent witnessed in the last financial year, according to CRISIL Ratings.
Ajit Velonie, senior director, CRISIL Ratings, told Business Standard that players will be more proactive in making provisions for early bucket delinquencies and implementing management overlays.
Sensing the prospects of pressure on asset quality in the second quarter ending September, Fusion Finance Ltd, a BSE-listed MFI, said over the weekend that it may be required to make an estimated credit loss (ECL) provisioning of between Rs 500–550. crore in Q2 FY25, compared to Rs 348 crore provision in Q1 FY25.
The asset quality of the microfinance portfolio deteriorated in Q1 FY25 as the heatwave across the country adversely impacted the income of borrowers and collections, along with rumors about loan waivers, according to Sa-Dhan, a self-regulatory organization (SRO) for MFIs.
There has been an uptick in delinquencies in the 30-plus days past due (dpd) bucket in the second quarter (ending September 2024). The collection trend is subdued in some pockets compared to the March quarter.
According to Sa-Dhan, loans with 30+ dpd rose to 2.7 per cent in June 2024, compared to 2.0 per cent in June 2023. The industry is showing a similar situation—an increase in the 30-plus dpd bucket—in the second quarter (like in the first quarter), but things should improve thereafter.
Growth has moderated as MFIs have decided to be cautious in growing their book, said Jiji Mammen, executive director and chief executive officer (CEO), Sa-Dhan.
Profitability, as measured by return on managed assets (RoMA), was elevated at 3.5–4 per cent in FY24, after a period of subdued profitability during and after the pandemic. Profitability is expected to moderate to around 2 per cent in FY25 due to higher provisioning and a marginal increase in operating expenditure as MFIs beef up their collections infrastructure, according to CRISIL.
NBFC-MFIs have the ability to adopt risk-based pricing due to the removal of the cap on interest margins, it added.
First Published: Sep 23, 2024 | 7:58 PM IST
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